The Discretionary Opt-out Provision and Other Grounds to Terminate the NBA CBA

Article XXXIX (39) of the NBA Collective Bargaining Agreement governs the term, or period of time, the contract is legally enforceable. It was signed on December 8, 2011 and remains in effect through June 30, 2021. Although Article 39 determines a significant issue, that being the beginning and possible end dates of the Agreement, it is a mere 3 pages long (pp. 377-380). In those 3 pages there are 6 separate provisions that allow one or both parties to terminate the agreement before its stated expiration date. As short as it is, it is longer than similar provisions governing termination of CBA’s in Major League Baseball, the National Football League or the National Hockey League. Article 39 is sub-divided into the following sections:

ARTICLE XXXIX TERM OF AGREEMENT ……………………………. 377

Section 1. Expiration Date ……………………………………………… 377

Section 2. Mutual Options to Terminate Following Sixth Season ……………..377

Section 3. Termination by Players Association/Anti-Collusion ………………….377

Section 4. Termination by NBA/National TV Revenues ……………………….377

Section 5. Termination by NBA/Force Majeure …………….. 378

Section 6. Mutual Right of Termination ………………………….. 380

Section 7. No Obligation to Terminate; No Waiver ……….. 380

Section 1: Expiration Date

Article 39, Section 1 provides that the 10-year agreement is effective from December 8, 2011 through June 30, 2021 unless terminated under another section of this Article:

Section 1 (Expiration Date)

This Agreement shall be effective from December 8, 2011 and, unless terminated pursuant to the provisions of this Article XXXIX, shall continue in full force and effect through June 30, 2021.

By comparison, the 2005 CBA was a 6 year deal with an owners’ option to extend it for an additional 7th year. Considering the opt-out provision in the current CBA, it is guaranteed to be in effect for just under 6 years.

Opting Out at the Discretion of the Parties

 

Section 2: Mutual Options to Terminate Following 6th Season

The intent of the parties was to allow either side to unilaterally terminate the agreement after the 6th season, 2016-17. That is why the opt out is keyed to June 30, 2017 instead of 6 years from December 8, 2011 (December 8, 2017).

Section 2 (Mutual Options to Terminate Following Sixth Season)

The NBA and the Players Association shall each have the option to terminate this Agreement on June 30, 2017 by serving written notice of its exercise of such option on the other party on or before December 15, 2016.

This mutual termination clause is what most reports about collective bargaining in the NBA are referring to without being specific, even though there are other termination provisions contained in the Agreement.

The title, “Section 2”, is a bit of a misnomer; rather than a “section” of the article, it is merely one sentence. It is open-ended in that there are no pre-conditions which have to be met in order to give rise to the parties’ right to exercise the option. No penalties are attached to the early termination of the Agreement or the service of notice of intent to opt-out. There is no provision for liquidated damages if the termination results in the cancellation of games or other negative economic consequences to the non-terminating party.

One effect of the totally discretionary early termination provision, one that doesn’t hinge on any pre-conditions, has been to engender speculation now, two seasons ahead of the effective date. Teams and players are betting on whether one side or the other will exercise the option. Agents and owners are left to consider whether a deal made now for a period of years ending prior to June 2017, or extending past that date, will pay/cost more or less under the current salary cap when compared with the anticipated increases in the salary cap. Can players lock in a longer term deal now for higher money under the current cap? Or would a shorter contract that allows them to demand money over the current cap at its expiration be better?

Of course, the uncertainty is one of the downsides of structuring the Agreement this way. One upside would be the chance to make early adjustments to the Agreement for issues that arise which were not anticipated by the parties at the effective date or for which the parties lacked sufficient information.

By comparison, Major League Baseball removes any uncertainty about the timeframe of its CBA. It is effective from dates certain 2012 through 2016.

Article 69 of the NFL CBA governs the duration of agreement which is effective from August 4, 2011 until the last day of the 2020 league year. The only permissible ground for early termination would be due to collusion under Articles 16 and 17 and only after a System Arbitrator’s decision finding the requisite conditions have been met. (comparable to Article 39, section 3 of the NBA CBA).

The NHL CBA most closely resembles the NBA CBA. In Article 3, the NHL Agreement is stated to be effective September 16, 2012 through September 15, 2022. The parties may serve notice of termination of the Agreement at least 120 days (May 15, 2022) prior to September 15, 2022 or not less than a like period in any year thereafter otherwise it will remain in effect. There is an early termination provision which allows each side to terminate the Agreement two years prior to the expiration date of September 15, 2022. To exercise this option, the NHL must deliver written notice to the NHLPA of its election to do so on or before September 1, 2019. If the NHL has not already done so, the NHLPA may exercise its option for early termination by delivery of written notification to the NHL of its election to do so on or before September 15, 2019.

The NHL CBA is in effect for at least 8 years with notice of early termination a full year ahead in contract year 7. The NBA CBA is in effect for 6 seasons before the early termination option kicks in. The NHL CBA also provides for a longer run-up, double the time the NBA requires, for notice prior to the actual termination date. The NHL requires 1 year notice and the NBA just 6 months notice. Under the NBA CBA in order to trigger the early termination effective June 30, 2017, the terminating party has to give written notice of their intent to do so by December 15, 2016.

Neither the NHL nor NBA CBA demands specific compliance with any preconditions to severe the agreement. Whether to opt out of the agreement is at the discretion of either party.

Further, the NBA CBA does not require the parties to engage in negotiations to reach a new CBA within a specified time. There is no requirement that a (federal) mediator meet with the parties to facilitate negotiations. Unlike other sections of the CBA that require disputes to be submitted to arbitration, when negotiating a new Agreement, the parties are not required to submit their disagreements to binding arbitration. The parties must simply negotiate in good faith.

Terminating the Agreement Under Certain Specified Conditions

Other provisions of Article XXXIX address the termination of the CBA by one party or the other only if certain events occur or under defined conditions. Sections 3, 4, 5, 6 and 7, respectively, allow termination if:

  • Article XIV, Section 15 is satisfied the players may terminate;
  • “national television revenues” and “other media income” fall below a certain threshold according to a mathematical formula spelled out in the CBA then the owners may terminate;
  • an act of war, terrorism, natural disaster or similar event makes it impossible to carry out obligations under the agreement the owners may terminate;
  • Articles VII, X, XI and XIV are vacated, enjoined or declared unenforceable, either party may terminate; and lastly,
  • the right to exercise an option to terminate the Agreement with respect to any season does not waive either party’s right, if any, to terminate the Agreement in any succeeding season.

Section 3: Termination by players in event of anti-collusion.

The prohibition on collusion, in its simplest terms, means that NBA Teams won’t act collectively with the league or any other NBA Team by agreeing: (a) to negotiate or not to negotiate with any Veteran or Rookie;(b) to submit or not to submit an Offer Sheet to any Restricted Free Agent;(c) to offer or not to offer a Player Contract to any Free Agent; (d) to exercise or not to exercise a Right of First Refusal; or (e) concerning the terms or conditions of employment offered to any Veteran or Rookie.

Section 3 (Termination by Players Association/Anti-Collusion)

(a)In the event the conditions of Article XIV, Section 15 are satisfied, the Players Association shall have the right to terminate this Agreement by serving written notice of its exercise of such right within thirty (30) days after the System Arbitrator’s report finding the requisite conditions (pursuant to Article XIV, Section 15) becomes final and any appeals therefrom have been exhausted or, in the absence of a System Arbitrator, by serving such written notice upon the NBA within thirty (30) days after any decision by a court finding the requisite conditions (pursuant to Article XIV, Section 15). In the latter situation, if the finding of the court is reversed on appeal, the Agreement shall be immediately reinstated and both parties reserve their rights with respect to any conduct by the other party during the period from the date of service of the termination notice to the date upon which the Agreement was reinstated.

(b)If the Players Association exercises the right accorded it by Section 3(a) above, this Agreement shall terminate as of the June 30 immediately following the service of the termination notice.

Section 4: Termination by NBA/National TV Revenues

There are two parts to Section 4: subdivision (a) defines the term “National TV Revenues” as the net income received by the NBA from television and other media broadcast agreements. Subdivision (b) gives the NBA the right to terminate the agreement if television revenue ($897 million was the annual revenue under the 2007 ABC and TBS contracts) plus 104.5% of other media income in the 2010-11 salary cap year becomes reduced by at least 35%.   “Successor agreement” refers to an agreement that comes after the term of the 2007 ABC and TBS television contracts. The NBA can terminate effective June 30th before the first season which would be covered by a “successor agreement” by providing notice by at least April 30th. Upon providing such notice of termination, both the NBA and NBPA are obligated to negotiate in good faith to enter into a Successor Agreement (See CBA Article VII(1)(c)(2)).

Section 4 (Termination by NBA/National TV Revenues)

(a)For the purposes of this provision: (i) “National TV Revenues” shall mean the rights fees or other non-contingent payments stated in the NBA’s third-party national broadcast network ( e.g.ABC) and cable network ( e.g.TNT or ESPN) television agreements (each, a “National TV  Agreement”); and (ii) “Other Media Income” shall mean the aggregate net income earned by any League-related entity (as defined in Article VII, Section 1(a)(1)) (but excluding net income attributable to ownership interests in any such League-related entity that is not owned by the NBA, NBA Properties, Inc., NBA Media Ventures, LLC and/or a group of NBA Teams) or by the NBA on behalf of the Teams from agreements that provide for the transmission of live (or delayed) NBA games, on a domestic or international basis, by means of television, radio, internet andany other mode of delivery referenced in Article VII, Section 1(a)(1)(ii), net of reasonable and customary expenses related thereto.

(b) If, during the term of this Agreement, (i) the sum of the average annual National TV Revenues provided for under the Successor Agreements (as defined in Article VII, Section 1(c)(2)), plus 104.5% of Other Media Income for the most recent Salary Cap Year, will be at least 35% less than (ii) the sum of the average annual National TV Revenues provided for under the NBA/ABC and NBA/TBS Agreements (which,for purposes of this provision only, the parties agree is $897 million), plus Other Media Income for the 2010-11 Salary Cap Year, the NBA shall have the right to terminate this Agreement effective as of the June 30 immediately preceding the first Season covered by the Successor Agreements, by providing written notice of such termination to the PlayersAssociation at least sixty (60) days prior to such June 30. During the period following delivery of such written notice of termination, the NBA and the Players Association shall engage in good faith negotiations for the purpose of entering into a successor agreement and the provisions of Article XXX shall remain in full force and effect.

In other words, if “national television revenues” and “other media income” fall below a certain threshold according to this mathematical formula spelled out in the 2011 CBA then the owners may terminate. In fact, since the 2011 CBA the overall league basketball-related income was much higher than the parties had modeled. The owners have signed a 9-year, $24 billion television deal which goes into effect in the 2016-2017 season. [1] That this type of increase was not predicted explains why there is no counterpart to Section 4 in which the NBPA is given an option for early termination in the event television and other media revenues increase by a certain percentage over the 2011 calculation.

Section 5: “Force Majeure”

Force Majeure termination clauses are not unique to sports. Such provisions are commonly found, for example, in leases, contracts or other agreements. The are intended to address each party’s legal rights and obligations in the event performance is impossible because of a crisis (natural disaster, war, act of terrorism, etc.). One example of a circumstance that this section anticipates is how to handle the issue of payment to players if one or more games cannot be played.

Section 5 (Termination by NBA/Force Majeure)

(a)“Force Majeure Event” shall mean the occurrence of any of the following events or conditions, provided that such event or condition either (i) makes it impossible for the NBA to perform its obligations under this Agreement, or (ii) frustrates the underlying purpose of this Agreement, or (iii) makes it economically impracticable for the NBA to perform its obligations under this Agreement: wars or war-like action (whether actual or threatened and whether conventional or other, including, but not limited to, chemical or biological wars or war-like action); sabotage terrorism or threats of sabotage or terrorism; explosions; epidemics; weather or natural disasters, including, but not limited to, fires, floods, droughts, hurricanes, tornados, storms or earthquakes; and any governmental order or action (civil or military); provided, however, that none of the foregoing enumerated events or conditions is within the reasonable control of the NBA or an NBA Team.

(b) In addition to any other rights a Team or the NBA may have by contract or by law, if a Force Majeure Event occurs and, as a result, one or more Teams are unable to play one or more games (whether Exhibition, Regular Season, or Playoff games), then, for each missed Exhibition, Regular Season, or Playoff game during such period (the “Force Majeure Period”) that was not rescheduled and replayed, the Compensation payable to each player who was on the roster of a Team that was unable to play one or more games during the Force Majeure Period shall be reduced by 1/94.6th of the player’s Compensation for the Season(s) covering theForce Majeure Period. For purposes of the foregoing calculation, and notwithstanding the actual number of games that any Team played, was scheduled to play, or could have played during the Seasons(s) affected by the Force Majeure Event, each Team shall be deemed to play seven (7) Exhibition games, eighty-two (82) Regular Season games, and 5.6 Playoff games during each such Season.

(c)In the event that Section 5(b) above applies, the applicable Compensation reduction from each player shall be withheld by the player’s Team from the first Compensation payment (or payments, if the first such payment is insufficient to satisfy the reduction) that is (or are) due or to become due to such player following the commencement of the Force Majeure Period (whether under the Player Contract that was in existence at the commencement of the Force Majeure Period or any subsequent Player Contract between the player and the Team). If such Compensation payment (or payments) is (or are) insufficient to cover the Compensation reduction required by Section 5(b) above, then either (i) the player shall promptly pay the difference directly to the Team (“old Team”), or (ii) if he subsequently enters into a Player Contract with, or is traded to, another NBA Team (“new Team”), such difference shall be withheld from the first available Compensation payment (or payments, if the first such payment is insufficient to satisfy the remaining reduction) that is (or are) due to the player from the new Team and shall be remitted by the new Team to the old Team.

(d)Upon the occurrence of a Force Majeure Event satisfying the terms of Section 5(a) above, the NBA shall have the right to terminate this Agreement as of the sixtieth (60th) day following delivery to the Players Association of a written notice of termination, which must be delivered to the Players Association within sixty (60) days of the Force Majeure Event. During the sixty-day period following delivery of such written notice of termination, the NBA and the Players Association shall engage in good faith negotiations for the purpose of entering into a successor agreement, and during such period the provisions of Article XXX shall remain in full force and effect.

Section 6: Mutual Right of Termination

Ironically, the shortest section in Article 39 is the mutual discretionary opt out in Section 2 which is the most likely ground the parties will cite for early termination. The other mutual right of termination exists in Section 6 but the exercise of the option is not wholly discretionary like Section 2; rather, Section 6 provides that if certain key provisions (“BRI”, salary cap, free agency, draft, anti-collusion) are held to be unenforceable or void either party may terminate the entire CBA.

Section 6 (Mutual Right of Termination)

If at any time during the term of this Agreement any provision contained in Article VII, X, XI and XIV of this Agreement is enjoined, vacated, declared null and void or is rendered unenforceable by any court of competent jurisdiction, then either the NBA or the Players Association shall have the right to terminate this Agreement by serving upon the other party written notice of termination at least sixty (60) days prior to the effective date of such termination.

Section 7: No obligation to terminate

Section 7 holds that there is no obligation to terminate and the parties do not waive their right to terminate in successive years if they forgo doing so initially.

Section 7 (No Obligation to Terminate; No Waiver)

The grant to either party of a right or option to terminate pursuant to the provisions of this Article XXXIX shall not carry with it the obligation to exercise that right or option; and the failure of the NBA or the Players Association to exercise any right or option to terminate this Agreement with respect to any playing Season in accordance with this Article XXXIX shall not be deemed a waiver of or in any way impair or prejudice the NBA or the Players Association’s right or option, if any, to terminate this Agreement in accordance with this Article with respect to any succeeding Season.

CONCLUSION

The two provisions of Article XXXIX (39) that have the greatest potential for modification in the next round of CBA negotiations are Section 2 and Section 4. The formula contained in Section 4 is outdated. Financial projections will dictate a more appropriate calculation. The NBPA may consider whether to advocate for an option to terminate the CBA early if the revenue projections increase along the lines of what occurred after 2011. This will depend on the term of the new CBA and how that term coincides with the term of the new television deal starting in the 2016-17 season.

Section 2 of the NBA CBA was contrasted above with the MLB, NFL and NHL Agreements.  Professional Baseball and Football do not have comparable discretionary early termination provisions; the NHL CBA does have a clause similar to that in the NBA CBA.

A middle ground between the different approaches could involve, as suggested above, mandatory mediation within a stated timeframe to try to resolve developing issues between the parties to give more clarity to the process than exists under the current agreement. The party with the disadvantaged position might also elect to receive liquidated damages under a formula analogous to the television and media revenue calculation in the current CBA Article VII(1)(c)(2) and Article XXXIX section 4. Such a formula could take effect after a defined period and thereby function to ensure timely and good faith bargaining if the party wished to avoid a monetary penalty.

Ultimately, negotiations pertaining to Article XXXIX will take place within the context of macro-level concerns about ensuring a financially stable business model; in addition to micro-level issues of revenue sharing and maximizing individual player and team profitability.

ENDNOTES

[1] See “Summer League Buzz: Owners the ones to watch in CBA negotiations”, Ken Berger, July 14, 2015 (www.cbssports.com/nba/writer/ken-berger/25242544/summer-league-buzz-owners-may-opt-out-of-collective-bargaining )

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