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.
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.
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.
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.
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 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.
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.
Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. He is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.