Sterling, NBA set for epic legal fight over Clippers
In a historic announcement,
NBA commissioner Adam Silver has handed Los Angeles Clippers
owner Donald Sterling a lifetime ban from the NBA, along with issuing
the maximum allowable fine of $2.5 million. Of greater significance,
Silver has also instructed NBA owners to oust Sterling as owner of the
team. The announcement sets the table for an epic legal fight over
ownership of the Clippers and the powers of the commissioner.
Legality of Sterling's suspension and fine
Silver
has broad authority under the NBA's constitution and bylaws to suspend
and fine an owner for conduct detrimental to the NBA. According to
Sliver, Sterling admitted it was his voice on the recording in which he
made racist remarks. Even if the recording was unlawfully created under
California law -- the recording would likely be unlawful if the
conversation was confidential and Sterling didn't give consent -- Silver
is authorized to punish Sterling based on the recording's impact on the
league. It is safe to say that Sterling's comments, which elicited
the rebuke of President Barack Obama,
have deeply harmed the NBA and its relationship with players, sponsors
and fans. Sterling seems to lack a viable argument that his conduct was
not seriously detrimental to the NBA.
Sterling is also
disadvantaged in challenging the suspension and fine because of how a
court would treat such a challenge. A court would review Silver's
decision under the deferential "arbitrary and capricious" standard of
review. This standard would essentially require Sterling prove that the
NBA -- and specifically Silver, acting as the NBA's ultimate arbiter --
failed to follow its own rules in how it investigated Sterling and
punished him. For instance, if the NBA failed to authenticate the
recording, concealed evidence or not requested a meeting with Sterling,
Sterling might have sufficient grounds. Silver's remarks during the
press conference, however, suggest all relevant rules and policies were
followed. Absent Sterling proving there was a procedural defect of
serious importance, Sterling likely has no viable appeal to either the
fine or suspension.
ROSENERG: Lifetime ban fitting punishment for Sterling
As
a practical effect, the suspension all but excommunicates Sterling from
both his team and the NBA. He is forbidden from any contact with
players, coaches and staff, and he is barred from attending games or
practices. Sterling is also prohibited from participating in league
activities. He is now, essentially, in NBA exile.
The fine of $2.5
million may seem inconsequential given that Sterling is worth
reportedly $1.9 billion, but it was the highest amount of money
permitted by the league's constitution and bylaws. Had Silver issued a
higher fine, and justified it on policy or moral grounds, he would have
provided Sterling with an opportunity to raise a legal point.
Specifically, Sterling might have argued such a penalty is "arbitrary
and capricious" because it would not have followed NBA rules. Silver, an
attorney, wisely adhered to the rules instead.
- Expect Donald Sterling to fight Silver's suspension
- Source: SI
Sports
Illustrated's Maggie Gray and Chris Mannix discuss NBA commissioner
Adam Silver's decision to impose a lifetime ban on Los Angeles Clippers
owner Donald Sterling.
Legality of NBA forcing Sterling to sell the Clippers
Silver
has also recommended that NBA owners effectively force Sterling to sell
the Clippers. The NBA has a procedure in place for this extraordinary
action, but the procedure contains enough ambiguity that debate among
owners is likely. Under article 13 of the league's constitution, three
fourths of the teams' ownership groups can vote to terminate a franchise
under certain conditions. The conditions are focused on financial
matters, such as an owner unable to meet payroll or an owner implicated
in financial impropriety. None of the listed conditions, SI.com is told,
apply directly to the type of conduct committed by Sterling. That said,
article 13 also contains a more general requirement of ethical conduct
in business dealings and contracts. Sterling's comments could be deemed
unethical. They have also clearly damaged labor relations between the
league and players, as players have gone so far as to consider
boycotting NBA games. Also, sponsors have dropped deals with the
Clippers. Should the NBA's owners vote to expel Sterling, the general
requirement language would likely be cited as supplying the main legal
justification.
RELATED: Sterling says Clippers 'not for sale'
While
Silver said he had not polled the owners, he expressed confidence there
will be sufficient support to oust Sterlin. Silver's bold prediction
suggests he has the necessary votes. That said, expect there to be some
debate among owners. No owner will defend Sterling's racism, but some
might question whether article 13 and potentially other authorizing
language was intended for this type of transgression. Expect some owners
to raise the following four concerns:
1. Neither the Clippers nor Sterling is in financial trouble. Article
13 was designed as an extraordinary remedy for such a problem -- not
other problems. While sponsors have dropped their deals with the
Clippers and players have contemplated boycotts, the team appears to be
in strong financial shape with a deep-pocketed, if reviled, owner. There
is no reason to believe that Sterling has committed financial fraud,
and while he has been sued over allegations of race, those cases were
either settled or unsuccessful.
2.The Clippers are not run in a racist way.
Sterling may be extremely bigoted and hold reprehensible views, but
there is no reason to suspect that the team itself operates in a racist
way. The current Clippers workplace appears to be a productive setting,
devoid of allegations by players or other employees that they have
experienced racism. Similarly, there are no reports that the Clippers
have directed ticket sales and marketing efforts away from minority
fans. As a franchise, the Clippers appear to be well-run, which would
make it an unusual candidate for termination.
3.Lack of 'morals clause'.
Article 13 lists a series of enumerated wrongs, some of which are
specific but none of which seem directly relevant to an owner whose
racism expressed in a private conversation sparks national outrage. Some
owners might argue that if the NBA wanted ouster as a remedy for a
situation like this one, the constitution and bylaws' drafters would
have included it. Along those lines, there is no "morals clause" in
these documents that empowers the ousting an NBA owner. The absence of a
morals clause, in contrast to the inclusion of other provisions, could
suggest that such a clause was intentionally omitted.
4. Precedent.
While Sterling's actions seem unlikely to be replicated by another
owner, some owners could worry that if they agree to oust Sterling,
different situations might give rise to the same consequence for other
owners. Once one owner is ousted, there is precedent to do it again.
Mark Cuban recently voiced those exact concerns, calling the situation
"a slippery slope."
Sterling suing the NBA and owners
In
addition to concern about proper interpretation of the relevant
language, some owners may worry about the prospect that Sterling will
sue. Sterling, an attorney, is regarded as one of the most litigious
owners in professional sports. If there is one owner who would sue over
expulsion, it's probably him. Sterling could seek a court injunction
preventing the NBA from expelling him. Such a move would likely happen
immediately after he is voted out. He could also file a lawsuit raising
breach of contract and antitrust claims.
RELATED: NBA world reacts to Silver's decision on Sterling
A
breach of contract claim would contend that Sterling's contract with
the NBA through his franchise agreement has been unlawfully severed. The
NBA, however, is poised to stress that owners agree to language
limiting opportunities for owners to sue the NBA and fellow owners. In
their franchise agreements, NBA owners agree to "waiver of recourse"
verbiage. The language has the effect of eliminating opportunities for
owners to pursue legal recourse against the NBA and fellow owners.
An
antitrust claim would likely center on both California and federal
antitrust laws, and contend that the NBA and its teams have conspired in
an anticompetitive way to oust Sterling and make him sell his team at
below-market value. Sterling would likely cite reports the NBA may be
interested in Magic Johnson buying the Clippers as evidence the league
is trying to force a sale to a specific buyer, rather than permitting
open bidding. Sterling might also highlight Silver's remarks today that
he's confident owners will oust him as evidence of collusive activity
between Silver and the owners. If Sterling were to sue under antitrust
law and prevail, he would also be entitled to treble damages. Several
attorneys familiar with NBA litigation tell SI.com that the possibility
of an antitrust lawsuit by Sterling is high.
The prospect of Sterling suing could be a source of worry to NBA owners for at least three reasons:
1. Sterling suing over franchise ouster could undermine the lifetime ban.
The ban is intended to separate Sterling from the Clippers and the NBA,
and as discussed above, Sterling likely has no viable case against it.
If, however, Sterling sues over franchise ouster, it would be a
high-profile lawsuit and he would remain in the news. Whatever
distancing of Sterling is achieved through a ban could be lost in a
high-profile case. It is also a case that could last years, as antitrust
cases often do.
2. Sterling suing may lead to pretrial
discovery, which could be designed in part to embarrass other owners and
NBA officials of any bigoted remarks or beliefs on their part.
Keep in mind, if Sterling is ousted because of racism, he would likely
demand that evidence showing that other owners and officials are also
racist be shared. He would use such information to portray his penalty
as unwarranted and contradicted by the conduct of those who ousted him.
Sterling might request emails and other records from owners and
officials that depict them in a negative light. Sterling has owned the
Clippers for 33 years, which suggests that he has had many interactions
-- including private conversations with league officials and owners. If
there are other owners who are racist or bigoted, it stands to reason
Sterling who knows who they are.
3. If Sterling wins or
extracts a settlement, not only could NBA owners be on the hook for an
expensive fee, but Sterling would seem victorious. The
appearance of him winning in court would greatly detract from the
important social message accomplished by the lifetime ban.
Important tax law considerations: avoiding capital gain taxes
Sterling,
who is 80 or 81 years old (his exact birthdate remains a mystery), has a
key financial reason to fight the sale of the Clippers: to avoid
capital gain taxes. This insight is from Robert Raiola senior manager in
the Sports & Entertainment Group of the Accounting Firm O'Connor
Davies, LLP. Sterling reportedly purchased the Clippers for $12.5
million in 1981. If he sold the team today, it would be worth at least
$600 million, perhaps closer to $1 billion. Between federal and state
capital gains taxes, Sterling would pay an approximately 33 percent tax
rate on the difference between what he paid for the team and what he
sold it for. For instance, if he sold the Clippers today for $1 billion,
Sterling would pay capital gain taxes of 33 percent on a gain of $987.5
million. As a result, Sterling would owe Federal & state capital
gain taxes of approximately $329 million.
RELATED: NBPA applauds decisions, but wants Clippers sold
If
instead Sterling holds onto the Clippers and some time from now passes
away, his family would inherit the team. The family would inherit the
team with a value pegged to its fair market value. As Raiola stresses,
the new value of the team would be crucial for purposes of capital gains
tax. Here's why: if the family inherited the Clippers and then sold it,
they would only pay a capitals gain tax on the difference between the
value of the team when they inherited it and the value of it when sold.
For instance, if the family inherited the team and it was worth $700
million and then they sold it for $800 million, they would only pay
capital gain taxes on a gain of $100 million. In that instance, there
would be a comparatively modest tax bill of $33 million.
If the
Sterling family inherited the Clippers and simultaneously sold it,
Raiola tells SI.com, they would pay no capital gains tax, but still have
estate tax issues. However, a transaction could be structured whereby
the employees of the Clippers organization could own a percentage of the
team. In such case, the capital gain taxes on a sale could be partially
or fully avoided.
These tax considerations make it more likely
that Sterling will fight the NBA to hold onto the Clippers. Even if he
ultimately loses a legal battle, the process of losing could take years
to play out in court. At the risk of sounding macabre, Sterling may be
motivated to wage a protracted legal battle in order to keep the team
for as long as he lives.
Important family law considerations: what if Mrs. Sterling files for divorce?
Sterling
and his wife, Shelly, are reportedly estranged but not divorced. One
potential legal complication for the NBA would be if Mrs. Sterling filed
for divorce before the NBA terminated her husband's ownership of the
Clippers. California is a "community law" state, which means Mrs.
Sterling would likely be entitled to half of her husband's assets. One
of his key assets is obviously the Clippers. Mrs. Sterling could
potentially use divorce court proceedings to slow down the NBA's ouster
of her husband, as she would have a vested stake in any sale of the
Clippers.
Could Sterling transfer ownership to Mrs. Sterling?
It
is possible that Sterling could try to transfer ownership of the
Clippers to Mrs. Sterling before the NBA ousts him. The NBA, however,
would have to approve such a maneuver, as Mrs. Sterling would be subject
to requirements the league uses to evaluate prospective owners. There
is virtually no chance the NBA would approve Mrs. Sterling in this
scenario as it would be a clear attempt to evade the NBA's discipline of
her husband.