NBA beginning to determine legal strategy in Donald Sterling case
The removal of Donald Sterling from the NBA becomes more complex each day, while rumors of pending litigation grow louder. Sources familiar with the NBA's strategy have provided SI.com with key legal insights on how the NBA plans to oust both Donald Sterling and his wife, Shelly Sterling.
Shelly Sterling is a non-controlling owner of the Clippers
The league, sources say, is not worried about Shelly Sterling's long-term involvement with the team. Currently, she is—as she stresses to the media—a "co-owner" of the Clippers. She and her husband own the team through a family trust. Her husband is barred from any involvement with the Clippers, not because he may later be forced to sell the team, but rather because he has been banned for life. Shelly Sterling, as commissioner Adam Silver has made clear, is not subject to any ban. She can attend games and partake in all activities consistent with those of co-ownership.
But Shelly Sterling's ownership of the Clippers should not be confused with control of the Clippers. This distinction reflects the different layers of NBA ownership. Most NBA owners are not in charge of their teams. They have been approved by the NBA to own some percentage of a franchise, but they do not represent their franchise on the NBA's Board of Governors and are not considered the official voice of their franchises. They are regarded as "non-controlling" owners. There are many perks to being a non-controlling owner, including attendance privileges, inside access to team operations and the ability to tell the world that you own an NBA team. But actual control over the team is not one of those benefits. Shelly Sterling is a non-controlling owner of the Clippers.
Donald Sterling, in contrast, is in a more exclusive and powerful category as one of the NBA's 30 controlling owners. Until his ban, he had final say over all matters Clippers and represented the team in league matters. In his absence, the office of the NBA commissioner has become de facto controlling owner. Earlier today, the league—not Shelly Sterling—installed a new CEO, former Time Warner CEO Dick Parsons, to run the team. While Shelly Sterling has signaled support for the move, her support is irrelevant under the law.
If Shelly Sterling wants to become controlling owner of the Clippers, the league would have to approve such a step. The NBA would not approve Shelly Sterling as controlling owner, sources close to the situation tell SI.com. The league would have compelling grounds to deny her attempt, as it would seem to constitute an "end-around" of the NBA ousting her husband. Shelly Sterling has also been implicated in some of the allegations of racism against her husband, particularly those concerning their ownership and management of housing properties in Los Angeles. Consequently, the NBA could refer to those transgressions as legal justifications to deny a transfer of her ownership from non-controlling to controlling.
California law works against Shelly Sterling keeping the Clippers
California is a community property state, which means that spouses in California jointly own assets acquired during their marriage. Shelly Sterling's ownership of the Clippers is thus inextricably intertwined with Donald Sterling's ownership under California law. In fact, it's believed the NBA could not take Donald Sterling's equity in the Clippers without also taking Shelly Sterling's equity, as the Sterling's joint ownership is legally one entity. There has been much speculation that California law would help Shelly Sterling keep the team, but attorneys familiar with the NBA believe the opposite is true: the unity in spousal assets achieved by California law means that Shelly Sterling must leave the NBA if the same fate befalls her husband.
Clippers franchise agreement will be used against Donald Sterling
In buying an NBA team, Donald Sterling signed a series of legal documents that contain covenants directly related to unethical conduct and immoral positions. These agreements include the franchise agreement to purchase the Clippers and the joint venture agreement in which Sterling contractually assented to the NBA having binding authority over independently-owned NBA teams. These agreements specify that owners are expressly forbidden from engaging in unethical conduct or "taking positions that have a materially adverse effect on the league." They also make clear the NBA commissioner is the final authority on interpreting owners' behavior as it relates to satisfying moral and ethical conduct.
Article 13(d) is the key legal instrument for the NBA to oust both Sterlings
Article 13 of the NBA's constitution details grounds for terminating ownership of an NBA team. There are 10 separate grounds to justify termination. The ground that has received the most attention, 13(a), is apparently not central to the NBA's legal strategy. 13(a) bars any willful violation of league documents. Its expansive wording was thought to give the NBA wide discretion in linking Sterling's conduct to his ouster. However, the fact that Sterling was privately recorded and that the recording was shared without his consent would make it difficult to prove he possessed a willful state of mind to break NBA rules. This is an important distinction from when Cincinnati Reds owner Marge Schott made racist comments in public, and thus wilfully broke MLB rules. Unlike Schott, Sterling presumably did not intend to publicly embarrass the NBA in public and harm its business. If he had such a desire, he would have likely used a public forum.
13(d) is more limited in scope, but, crucially, does not require Sterling intended to harm the league. 13(d) states that an owner cannot "fail or refuse to fulfill....contractual obligations to the Association, its Members, Players, or any other third party in such a way as to affect the Association or its Members adversely." Sterling's failure to adhere to covenants contained in his franchise agreement and joint venture agreement, among other documents, arguably meant that he failed to satisfy his contractual obligations. The fact that players threatened a boycott and sponsors dropped their support of the Clippers after Sterling's words were made public suggest that Sterling adversely "affected" the NBA and its members adversely.
The NBA also interprets article 13 to mean that if Donald Sterling's financial interest in the Clippers is terminated, the same holds true for others who have legal claims in that interest. As the Clippers are owned through a Sterling family trust, all members of the trust would lose their ownership if the NBA ousts Donald Sterling. Put bluntly, once Donald Sterling is out, the same holds true for the rest of the Sterling family.
NBA is not concerned with accusations of hypocrisy or worries of a "slippery slope"
League officials, sources say, are not concerned with the fact that NBA owners in the past have likely engaged in immoral or unethical conduct without facing league discipline, let alone expulsion. The NBA is focused as much, if not more, on the impact of conduct as the conduct itself. From the NBA's vantage point, Sterling caused a massively negative and unprecedented business impact. The league was genuinely worried about playing games as players threatened a boycott. The President of the United States sharply criticized Sterling and linked Sterling's remarks to the legacy of slavery. Even if Sterling's underlying conduct -- making racist statements in private -- could be considered unexceptionally wrong, the impact of his conduct triggered exceptional, unprecedented and global harm to the NBA. This reasoning explains why, although Sterling had previously been implicated in racist behavior through lawsuits brought by former general manager Elgin Baylor and the U.S. Department of Justice, those incidents did not (for whatever reason) trigger the same social outrage and threaten the NBA's business operations.
The NBA is also not concerned about the risk of a so called "slippery slope" of other owners being ousted. This is a fear that Dallas Mavericks owner Mark Cuban has raised. The requirement of a super-majority of three-quarters of NBA owners voting out an owner was incorporated into the NBA constitution for a reason. It was configured, sources say, to prevent owners from easily ousting each other. The design of the NBA's constitution makes it unlikely that owners would oust another owner anytime soon. Only truly exceptional controversies that damage the NBA's business relations are likely to implicate ouster.
NBA expects Donald Sterling and possibly Shelly Sterling to sue
The NBA, sources say, is "gearing up" for Donald Sterling to file a lawsuit against the league and other owners. The league takes notice to the fact that Sterling has been meeting with prominent law firms. By doing so, Sterling apparently hopes to communicate to the NBA—and his fellow owners—that he will not go down without a fight. The NBA is also aware of the substantial tax benefits Sterling would obtain if he holds onto the team and avoids capital gain taxes (benefits first raised by Robert Raiola, senior manager in the Sports & Entertainment Group of the accounting firm O'Connor Davies, LLP, for SI.com).
The league, sources say, believes it is on strong legal grounds. Sterling's own signature will ultimately come back to haunt him. He signed a series of documents that, in so many words, express that he agreed to whatever disciplinary steps are taken by the commissioner and his fellow owners. While a court could review the NBA's interpretation of the constitution, bylaws and other agreements, a court would accord Silver broad deference to interpret the language of these documents. As to an antitrust claim, sources say it would require a quixotic interpretation of the antitrust law for Sterling to prevail. He would have to show that the NBA and its owners have conspired against him in an anticompetitive way, thus harming the Clippers' value and his return on its sale. Antitrust attorney and law professor Chris Sagers tells SI.com he is pessimistic that Sterling would prevail. "[T]he only injury he'll be able to state would be that he is forced to sell when he doesn't want to and that he'll have to recognize taxable gain at an inopportune time . . . neither seem like an antitrust injury. Merely forcing the sale of the Clippers doesn't remove the Clippers from competition with the other NBA teams and with other entertainment products."
Still, the NBA is aware that Sterling could drag on litigation for months, if not longer, and that pretrial discovery might cause the NBA embarrassment. Sterling's attorneys would likely try to expose fellow owners as bigoted while they are answering questions under oath. Sterling's attorneys would also seek to depose former NBA commissioner David Stern under oath and portray him as engineering a cover-up of NBA owner bigotry.
Shelly Sterling could also sue the NBA and owners, although her legal grounds appear weaker than those of her husband. As noted above, she is not a controlling owner of the Clippers and her marriage to Donald does not make her controlling owner should he be ousted. Whether she agrees with such an interpretation is another story. That is what lawyers are for.
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.