SBJ/20090817/Special Report

Deal or no deal?

Call it sports labor’s disharmonic convergence.

After suffering only one labor stoppage in the last 10 years, the major American sports leagues are headed into a time of unprecedented uncertainty. Each is dealing with its own complex set of issues between owners and players, including some points that have been controversial nearly from the day the previouscollective-bargaining agreements were signed.

And all of the leagues are dealing with an economy that has proved to be the worst in more than a generation and has affected nearly every corner of the business.

On top of that comes something no one at the four leagues or the four unions can remember happening before, the equivalent of a full solar eclipse on the sports labor calendar: All four major team sports have collective-bargaining agreements expiring in the same year, 2011.

It adds up to a lot of unknowns. A series of interviews by SportsBusiness Journal with top negotiators on both sides of the table in all four sports reveals hope from all sides that deals can get done, as well as frank acknowledgments that there could be a work stoppage in at least one of the sports.

The commissioners and some team owners in the NFL and NBA, both of which have begun formal bargaining, have made it clear that they are looking for changes in their salary cap systems, which regulate what they pay their most critical employees, their players. Those on the labor side of the table say major changes typically mean major concessions.

In the NHL, players are unhappy with the CBA they ratified in order to end the 2004-05 lockout. And despite numerous concessions from players, NHL owners are not entirely satisfied with it either.

In Major League Baseball, the MLB Players Association is investigating whether owners colluded to drive salaries down in the last free agent market. Both union and league officials say it is too early to say what will happen in 2011.

“We could have peace in all of them,” said Bob Batterman, who serves as outside labor counsel to the NFL and NHL as a partner at the powerful Proskauer Rose law firm. “We could have war in all of them, [although] I think that is very unlikely.”

But the heads of the two unions that have begun negotiations, NFLPA Executive Director DeMaurice Smith and National Basketball Players Association Executive Director Billy Hunter, both say they believe owners may be preparing to lock their members out.

“I have been through the lockout,” Hunter said. “I can see a fight coming into this one. I don’t want it. But you play the hand that is dealt to you.”

‘The world has changed’

For many of those coming to the bargaining table, everything starts with the recession.

“I think that our players understand completely that the world has changed,” said NBA Commissioner David Stern. “They look outside. They live in Detroit. They live in Phoenix. They live in California. They understand unemployment is at 11 percent, that office vacancies abound. The players understand those are our fans, the ones who aren’t working, who are in foreclosure, who don’t have jobs in offices.”

Revenue for professional sports leagues has increased regularly over the years, and that increase has made it easier for deals to be made between leagues and players unions. In the last 10 years, only the NHL has suffered a work stoppage, the lockout of 2004-05.

But in most leagues that revenue growth has run into a brick wall in the form of the recession, which could make new agreements much more difficult to reach, labor experts say.

Hunter and Stern, who shook to end the 1998-
99 NBA lockout, again face tough issues.

Howard Ganz, Batterman’s partner at Proskauer Rose, who serves as outside counsel to the NBA and to Major League Baseball, said the current economy is the biggest issue for owners and leagues as they prepare for collective bargaining with players unions.

Ganz said the economy’s overall effect on sports leagues isn’t yet clear because many of the leagues’ biggest revenue-generating deals were made when times were better and stretch over multiple years.

“Those arrangements will be coming to a conclusion over the next year or two. And who knows whether sponsors are going to continue to spend lots of money on sports promotion,” he said. “At the same time costs have not declined.”

Batterman said the economy is affecting how sports team owners look at their costs of doing business, and players’ salaries make up the majority of costs in all of the leagues. “The feeling among all the owners and all the senior management teams in all the leagues is the business is changing,” he said.

Owners are questioning whether growth opportunities for revenue are going to continue “or do we need to revisit the revenues or shares [guaranteed to players] as a result?” Batterman said. “ I don’t know that there are any answers yet, but I think that question is being raised all over.”

At the same time, they say their expenses outside player salaries also continue to rise.

“You’ve got a lot of costs with sponsorship, with fulfillment, our fans are asking more. Our business partners are asking more,” said NFL chief legal officer Jeff Pash.

Before the recession, sponsors and advertisers increasingly were asking leagues and clubs what return on investment they would get in a deal. Now “it seems like you get those questions much more quickly and that there is a lot more rigor in the analysis that goes into it,” Pash said.

But NFLPA officials say the NFL has not provided them with any information about their costs. “The union thus remains in the dark as to what the owners consider to be the main items for the negotiations,” NFLPA outside counsel Jeffrey Kessler said after two formal bargaining sessions with the NFL.

And the NBPA’s Hunter noted that the NBA bought a full page ad in The Wall Street Journal touting the league’s third-highest attendance ever and increases in television viewership. “So you tell me what they mean,” Hunter said.

Although other issues often emerge in CBA negotiations, like age limits and marketing rights, negotiators on both sides of the table say that in this round of talks, the main issue is players’ share of league revenue. “It’s about dividing up the Benjamins,” Hunter said.

The economy, and whether it improves between now and 2011, is also a wild card. Labor experts say that a bad economy favors owners seeking concessions, but negotiators on both sides of the table said it is much easier to get a deal done in good times versus bad.

Update for salary cap?

The salary cap system that exists today in the NFL, NBA and NHL, in which team payrolls are capped at a percentage of league revenue, was invented by Stern in 1982, when he was executive vice president of the NBA.

But now, there is talk from Stern about a whole new system.

“As we begin [negotiations] there may be just a completely different way of doing it that doesn’t involve any percentage or salary cap,” Stern said. “I don’t know. We’ll have to see. There may be a system the players suggest to us that brings our teams to profitability that isn’t … a system we are familiar with.”

And in the NFL, the salary cap system that began in 1993 is not working for owners anymore, said Pash, who is leading negotiations for the owners. “It may have been perfectly sound in 1993 when it was entered into, but it has not evolved in a way that reflects the operations of the National Football League in 2009,” Pash said. Among other things, Pash said that system does not take into account owners increased costs, including more privately financed stadiums and debt service.

The 2004-05 NHL lockout was the
only major sports work stoppage in
the last 10 years.

But on the players side, no one seems convinced that there is a need to throw out the salary cap system for a new system that they believe would further restrict players’ earnings.

Speaking before the Sports Lawyers Association in Chicago earlier this year, MLB Players Association Executive Director Donald Fehr — who has led the baseball players’ successful fight for 25 years against a salary cap — questioned why team owners, who sold the salary cap in the first place, were now saying the system was not working.

“One of the benefits of the salary cap system that has been in effect in the other sports has been the suggestion that it automatically adjusts for economic conditions,” Fehr said. “Players do better when the games do better… everyone sees a decline when revenues decline, and therefore, we don’t have to continually rebargain everything.”

“It doesn’t surprise me — although I think it is inconsistent with the basic philosophy as expressed for the cap — that when revenues go down, management wants to revisit the cap … because it doesn’t do what they said,” Fehr said.

Management side sources say the traditional cap is not working anymore because it was based on an old cost structure, and that cost structure has significantly changed in the last few years.

Stern, who recently revealed that fewer than half of the 30 NBA clubs are profitable, said the current cap in the NBA doesn’t take care of the problem of a decline in revenue, in part because the cap is set after the revenue has declined. Stern said. “I mean, if it takes care of it, presumably there wouldn’t be any losses.”

No ‘pattern bargaining’

Unless deals are cut before the leagues reach their deadlines, the CBAs will expire near the end of each quarter in 2011. The NFL’s deal is up in March, the NBA is next in June, the NHL is third in line in September, and Major League Baseball is last in December.

Though no one can predict what will happen in the labor talks between the four leagues and the unions, there is an oft-repeated sentiment that nothing ever gets done in labor negotiations until there is a deadline. The expiration of the CBAs is the major deadline, since players can not strike and owners can not lock out until the labor deals expire.

 The timing is unprecedented, but all league and union officials interviewed for this story agreed that no one conspired to engineer the timetable. At the same time, sports management and labor leaders aren’t sure what it will mean, other than a greater emphasis by the mainstream sports media on sports business and labor issues.

“Obviously, all the sports look at what is going on in the other sports,” said Rob Manfred, MLB executive vice president, who leads labor negotiations for the clubs. But the sports industry does not engage in “pattern bargaining” like the auto industry, in which the first labor deal struck dictates successive labor deals, he said. Kessler, who serves as outside counsel to both the NFLPA and NBPA, said one negotiation may have little or no effect on another negotiation in another sport because the CBAs and the issues associated with them are so different.

“The amount of revenue sharing in the four sports is vastly different, the amount each sport depends on national revenues; the average career length in the four sports is different; the overall financial health in the four sports is different,” Kessler said.

There is, however, what Kessler calls a “psychological intersect” in which owners in one sport will be mindful of how negotiations are going or labor tactics are being used in another sport. “If one strategy is successful in one sport, people might think it could be successful in another sport,” he said.

Other industry experts noted that because there is cross-ownership among the sports, owners who win a labor victory in one sport could push harder for gains in another sport.

The sports unions, too, have historically supported each other, at least verbally, in times of labor unrest.

 Hunter said the expiration of all four deals in the same year was something he discussed at length with Gene Upshaw, his good friend and the former NFLPA executive director, before Upshaw died unexpectedly last year.

“If it resulted in any one group being locked out, I think he sort of saw himself at the front because the NFLPA agreement is the first to expire.” Hunter said. He has not yet addressed this issue with Upshaw’s successor, Smith.

Upshaw, Hunter said, “thought it provided an opportunity that I guess we could all … unify if we all kind of took a universal position about the concerns of our players.”

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