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Sterling will argue privacy, breach of contract in lawsuit vs. NBA

Photo: Danny Moloshok/AP

Donald Sterling will have to overcome several obstacles to get his recorded remarks thrown out.

Sterling's lawsuit focuses on the recording's privacy

Donald Sterling's lawsuit raises five causes of actions and they center on the NBA's use of Sterling's recorded comments to V. Stiviano. Sterling contends the recording was in violation of California privacy law and therefore the NBA cannot use it. There are several obstacles for Sterling in raising such an argument.

First, the NBA was a third party to the recording and California privacy law only contemplates parties to a recording. The league obviously had no role in the creation or distribution of the recording. The NBA's use of the recording, the league would argue, should fall outside the scope of California privacy law. The league would also stress the recording caused massive damage to NBA interests and that the league had a fiduciary duty to combat the damage. From this lens, the NBA swiftly disciplining Sterling constituted a necessary step and was not limited by California law.

Second, the NBA constitution makes clear the commissioner's office need not follow courtroom rules of evidence in internal investigations and disciplinary matters. The constitution also contemplates New York law, not California law, as the state law applicable to disputes. Sterling contractually agreed to these rules.

Third, the league has other evidence to corroborate the recording. Sources tell SI.com the NBA has "direct testimony" from Stiviano that confirms Sterling made the remarks. Stiviano met with NBA investigator David Anders as part of the NBA's investigation. As a result, even if the NBA cannot use the recording, it can rely on testimonial evidence from Stiviano.

Fourth, sources tell SI.com the recording was probably not a private conversation, and that Sterling may have consented to being recorded. If Sterling gave his consent, his entire argument under California privacy law collapses.

NBA prepared to argue impact of recording over recording itself

From Sterling's perspective, he is losing his NBA team because of regrettable, but fundamentally private remarks. NBA lawyers will argue a very different perspective. Sources say they will argue Sterling "can't wish away the magnitude" of his words. "Magnitude" is the key word. The league will assert Sterling is not subject to league discipline because of his words, but rather because of the substantial harm his words inflicted on the NBA. The impact included a near boycott by NBA players, a rash of lost corporate sponsorships and harsh words by President Obama, politicians, civil rights leaders, fans and many other groups. This is a crucial point: In the NBA's view, the private setting of Sterling's remarks is irrelevant because his remarks became public (through no fault of the NBA) and subsequently damaged the NBA.

Sterling claims breach of contract, but NBA will argue no breach

As he did in his answer to the NBA charge, Sterling insists that he was denied a fair opportunity to present his case to the NBA. He highlights how the NBA gave him only five days to respond to "1,000 of pages of exhibits, declarations, reports, and surveys" in support of its charge, and how the league rejected his request for an extension. The suspension, in Sterling's view, also prejudiced his opportunities to obtain the necessary data to examine if he truly harmed the league. Sterling also frames the NBA as hypocritical and arbitrary. The league issued the ultimate penalty against him, yet imposed comparatively light penalties on other owners and players for their misdeeds. Lastly, Sterling claims he simply did not break the NBA constitution, and the NBA is misinterpreting its own document.

The NBA's defense of Sterling's allegations begin with a favorable standard of review. A court examining Sterling's argument that the NBA is in breach of its own agreements will likely apply an "arbitrary and capricious" standard of review. This is a very deferential form of review and it will be difficult for Sterling to prevail under it. Sterling will have to establish that the NBA didn't follow its own rules or, without justifiable reason, treated him worse than everyone else. The NBA, in contrast, will assert commissioner Adam Silver and executive vice president and general counsel Rick Buchanan are afforded broad discretion in how they interpret NBA rules and regulations, and their interpretation in regards to Sterling was appropriate.

The NBA will also emphasize that Sterling's penalty is uniquely high because of the unique impact of his conduct, rather than the conduct itself. The league will also charge that Sterling was in breach of Article 13(d), among other provisions, by breaking his contractual covenant to avoid positions adverse to the NBA. Sterling's contention that the league rushed to justice may have legs: the NBA acted swiftly and decisively in punishing him, and perhaps Sterling was not afforded adequate time to respond. To counter that point, expect the NBA to assert that Sterling was not afforded less time than other owners subject to NBA investigation and also that Sterling was provided an opportunity to make his case to the league. The league will also emphasize that comparisons to player discipline is irrelevant, as players are punished under a different source of law: the collective bargaining agreement.

Sterling's antitrust arguments against the NBA: pros and cons

Sterling pleads an interesting antitrust claim. His thesis is that the NBA and the 29 other owners have conspired to force him out of the league in a way that damages competition for NBA teams. He stresses that in a "free market, unfettered by the NBA," he would be able to keep or sell the Clippers at his own choosing, and that the NBA has interfered with this market. Sterling further charges that a forced sale of his team risks a lower purchase price than would be obtained in a non-forced sale, and that such a sale is "unresponsive to consumer preference."

Sterling's antitrust argument has raised skepticism from many antitrust experts. Keep in mind, Sterling has contractually agreed that ownership of an NBA team isn't in a free market. There are numerous rules, found in the league constitution and bylaws, that make owning an NBA team much more regulated from owning most types of businesses. Among those rules is that the league has ultimate authority over franchise ownership. Also, Sterling's ouster as Clippers owner poses no disruption to the underlying asset: the team. If the NBA was contracting the Clippers and removing it from competition of other NBA teams, Sterling may have a more plausible argument for antitrust injury. But the team isn't going anywhere. Only Sterling is departing.

Sterling's contention that the purchase price of the Clippers in the forced sale may have proven harmful also seems like a non-starter. The Clippers will be sold for $2 billion, the most amount ever paid for an NBA team and four times the team's valuation last year.

Sterling's point about consumer preference seems misplaced as well. On Thursday, E-Poll Market Research ranked Sterling "the most hated man in America" and his ownership of the Clippers has attracted criticism for years. It seems likely that most consumers of Clippers games and merchandise would prefer Steve Ballmer leading the Clippers instead of Sterling.

Sterling may seek a temporary restraining order to block the sale

As Robert Raiola first identified on SI.com, Donald Sterling's lawyer has a reason to object to the sale of the Clippers: capital gain taxes. Sterling will pay approximately 33 percent in federal and state capital gain taxes on the difference between his cost basis and the sale price of the team. If the Ballmer deal goes through, Donald and Shelly Sterling will pay about $662 million in capital gain taxes. That would leave him with approximately $1.34 billion after tax. If Donald Sterling holds onto the team and dies before a sale takes place, his heirs would inherit the team at its present-market value. The value of his share of the team would therefore "step up" and should they later sell it, they would only pay capital gain taxes on the difference between the value when they inherited it and the sale price. To be clear, inheritance issues can be complicated, and as Raiola stresses, the Sterling estate might be obligated to pay significant estate taxes outside of any capital gain taxes.

Sterling can attempt to hold onto the team by petitioning a court to grant a temporary restraining order that would enjoin the NBA from carrying out the sale. Sterling's lawsuit references seeking a temporary restraining order as a necessary step to respond to the NBA. As with Sterling's other legal claims, standard of review would work against him, as such orders are considered extraordinary forms of relief. But sports litigator Eugene Egdorf tells SI.com that Sterling may have a viable path. Egdorf believes the NBA could struggle to legitimately show there was no forced sale, when the league "apparently unilaterally removed Sterling as controlling owner, without a vote or hearing, and gave [the Clippers] to his estranged wife to only then immediately sell the team just as the NBA desired, without his permission (or permission clouded by possible mental incompetence). Incredibly the NBA then approved the sale in less than 24 hours. The NBA can't credibly contend its fingerprints are not all over this."

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