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NBA scores legal victory with Sterling indemnity

Photo: John W. McDonough/SI

Shelly Sterling disagrees with her husband Donald as to the state of his mental capacity.

NBA scores legal victory with Shelly Sterling and the Sterling Family Trust indemnity

On the surface, Shelly Sterling, on behalf of herself and the trust, indemnifying the NBA is a major legal victory for the league. It means that if Donald Sterling's lawsuit against the NBA succeeds, Shelly Sterling and the trust would reimburse the NBA for all costs. This is significant because Sterling's lawsuit claims the NBA violated federal antitrust law, an especially threatening area of law. If Sterling succeeds in an antitrust claim, he would be entitled to treble damages. A successful $1 billion antitrust lawsuit, for instance, would require the NBA and the 29 other owners to divide a $3 billion bill made payable to Donald Sterling. Antitrust cases are also fact-intensive and expensive, with each side often retaining dueling economists to measure harm to competition. The NBA having the certainty of reimbursement in litigation commenced by Donald Sterling could prove of sizable value to the league.

Indemnification is an important instrument in law, and here could be worth billions of dollars to the NBA. It entails a contract between two parties in which one party (here Shelly Sterling and the trust) agree to pay for legal fees and potential damages suffered by the other party (the NBA).

POINT FORWARD: Breaking down the NBA's decision to resolve its dispute with the Sterlings and approve sale of the team to Steve Ballmer

The indemnification also implies that Donald Sterling would effectively be suing half of himself. Sterling owns half of the Sterling family trust, and California is a community property state, meaning Donald and Shelly's wealth since they married 59 years ago is divided evenly. If the Sterling family trust and Shelly Sterling pay the NBA $1 billion, Donald Sterling would effectively be paying half of the amount owed to himself. This arrangement is an obvious deterrent to Donald Sterling to wage a lengthy battle against the NBA.

Possible limits to indemnification that may influence Donald Sterling's legal strategy

Indemnification could prove much more complicated for the NBA than at first glance. And for at least three reasons, it may prove not as deterring to Donald Sterling.

First, it is not yet clear if the indemnification agreement between Shelly Sterling and the NBA covers all possible legal claims brought by Donald Sterling. Indemnification agreements are often limited in the types of lawsuits they cover. It is possible that Shelly Sterling and the trust cover some but not all claims Donald Sterling could bring against the NBA. If the agreement does not cover federal antitrust law or California privacy law, the NBA may not be as legally protected as it seems tonight.

Second, Donald Sterling is poised to sue Shelly Sterling over her capacity to represent the family trust. Donald and Shelly Sterling appear to disagree about whether he is mentally incapacitated, which in turn raises questions about whether she can sign legal instruments on behalf of the family trust and without his consent. Issues of mental capacity are often complicated and divisive, and can involve extensive proceedings in probate court. If the Sterlings have only begun a legal fight over Donald Sterling's capacity, resolution may be months or even years away.

Third, even if the NBA is reimbursed for all costs by Shelly Sterling and the trust, Donald Sterling could still use pretrial discovery to embarrass NBA owners and former commissioner David Stern. If his lawsuit is not dismissed, Donald Sterling would seek court approval to require owners and Stern to answer sensitive questions under oath. Sterling would insist that his ouster from the NBA is fundamentally about bigoted comments made in private, he would want to establish that other owners have engaged in similar misconduct without penalty. He would also want to depose Stern about what he know about owner misconduct and what he did about it.

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.

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