The end of the Donald Sterling saga is a victory for the NBA
Merely a week after his attorney pledged a fight "to the bloody end" to keep the Clippers, Donald Sterling has bloodlessly dropped his lawsuit against the NBA. The NBA Board of Governors is expected to approve former Microsoft CEO Steve Ballmer, who last week reached a deal to buy the Clippers for $2 billion, as the next Clippers owner. Donald and Shelly Sterling, who together own the Clippers through a family trust, will split the $2 billion. According to an estimate by Robert Raiola, a senior manager in the Sports & Entertainment Group of the accounting firm O'Connor Davies, LLP, approximately $662 million of the $2 billion will be paid to the I.R.S. and California Franchise Tax Board in capital gains taxes.
Sterling's decision ends an extraordinary controversy that began about five weeks ago, when TMZ.com published a recording of Sterling making racist comments to an acquaintance, V. Stiviano, about an Instagram photo in which she posed with Magic Johnson. The recording sparked an international controversy for the NBA. Players threatened a boycott, corporate sponsors dropped the Clippers, and President Obama, along with other leaders, expressed outrage at Sterling's remarks. The controversy was like none before it, and it occurred just two months after Adam Silver succeeded David Stern as NBA commissioner.
Decisive legal win for NBA and validation of league strategy
The NBA outmaneuvered Donald Sterling at every step, making it virtually impossible for him to wage an effective legal fight. The league's immediate response to the TMZ story was to conduct an investigation and verify the authenticity of the recording. The NBA retained former assistant U.S. attorney David Anders to lead this investigation, with Silver, an attorney by trade, and NBA executive vice president and general counsel Rick Buchanan overseeing the operation from league headquarters. Anders obtained crucial evidence that authenticated both the recording and Sterling's voice, and he received direct testimony from Stiviano. Stiviano's statements were crucial. They ensured the NBA would not have to rely exclusively on the recording, which may have been created unlawfully under California law. Even though the NBA likely possessed a clear legal right to use the recording, the testimony from Stiviano was powerful backup evidence.
Silver's move to suspend Sterling for life and recommend the Board of Governors end Sterling's ownership was bold and exceeded what many expected. In hindsight, Silver's decisive course of action was the right one, as NBA owners were put on immediate notice the commissioner wanted them to vote out Sterling. Any goodwill Sterling might have obtained over the years from friendships with fellow owners was likely outweighed by Silver's clear directive. Sterling was quickly in the hole.
The NBA then built a compelling legal case against Sterling and adroitly used the league's constitution. To execute this strategy, the league quickly pivoted from expressing outrage over Sterling's words to highlighting the damage Sterling caused the NBA. The NBA made this shift in rhetoric to quash concerns, most notably from Mavericks owner Mark Cuban, that Sterling was receiving the harshest punishment possible over fundamentally private comments. Sterling, the league contended, was being punished not for his words but for the deleterious effects of those words on the NBA. The league also assured NBA owners that ousting Sterling would not create a precedent to oust owners, especially since the league constitution was designed to make such an ouster very difficult: a super-majority of three-quarters (22 of the 29 other ownership groups) is required.
This line of argument also helped the NBA mollify serious criticism for the league's past failures to oust Sterling over housing discrimination, an obviously far more serious matter than racist comments made in private. The league's emphasis on impact helped NBA officials talk through the topic of Sterling's housing discrimination. Sterling, officials noted, was able to settle housing discrimination lawsuits before they caused public outrage and thus before they harmed the NBA. Sterling's remarks to Stiviano, in contrast, caused public outrage and negatively impacted the league.
The NBA also used the bevy of legal documents Sterling, an attorney by trade, signed with the league. Two of those documents, the franchise agreement and the joint venture agreement, contained covenants prohibiting Sterling from taking positions adverse to the NBA. Breach of those covenants enabled the NBA to argue Sterling violated Article 13(d), which empowers the league to oust an owner from violating contractual obligations. The league was aware it could interpret the constitution broadly. Any legal challenge by Sterling to the NBA's interpretation of its own constitution would have required Sterling to prove the NBA acted "arbitrarily and capriciously." This is a deferential standard that would have been extremely forgiving to NBA interpretation.
Any fleeting chance Sterling may have held to win at least eight of the 29 ownership votes was forfeited in his bizarre and caustic interview with CNN's Anderson Cooper. While Sterling assured Cooper he was sorry for his remarks to Stiviano, he viciously and inexplicably attacked the character of Magic Johnson. If Sterling thought his fellow owners would appreciate an ad hominen assault on Johnson, he was sorely mistaken.
The league catches a break with a cooperative and astute Shelly Sterling
Until the last two weeks, Shelly Sterling was thought to be a potential roadblock for the NBA to remove her husband as owner. Shelly Sterling owns half of the Clippers through a family trust, but she is a non-controlling owner. Donald Sterling, in contrast, is the team's controlling owner, which gives him the power to sell the Clippers with NBA approval. There was some speculation Shelly Sterling, who has been implicated in her own controversies over the years, might use her interest in the Clippers to block a sale. It was also thought she might divorce her husband of 59 years and, since California is a community property state, demand a judge conduct a fair market valuation of the Clippers. Such a valuation could have taken months or longer. Finally, Shelly Sterling's suggestion to Barbara Walters that her husband may be suffering early signs of dementia was initially viewed as an attempt to cast the NBA as trying to oust an elderly man who is no longer responsible for his choice of words.
Instead, Shelly Sterling, with Donald Sterling's apparent knowledge if not his blessing, sought out offers for the Clippers. She did so while recognizing the NBA Board of Governors was going to vote out Donald -- and by legal extension her -- on June 2. She wisely created a brief but intense bidding war for the Clippers, with bidders having to put in their best offer as their only bid. Ballmer's $2 billion offer topped the list, but there were several other bids that far exceeded expectations for the Clippers, which were valued last year at $500 million. Shelly Sterling also knew Ballmer would be well-received by the NBA, which had favorably screened Ballmer last year when he tried to buy the Sacramento Kings. Ballmer is also friendly with many NBA owners and is a lock to be approved by the Board of Governors.
Shelly Sterling still faced an obstacle: how could she sell the Clippers while her husband was uncertain about selling the team? Her attorneys believed she could take over the family trust because doctors had apparently declared Donald Sterling mentally incompetent due to dementia. It remains unclear if a probate court ever approved such a declaration, and we may never find out.
Donald Sterling's lawsuit had almost no chance of success
Shelly Sterling's declaration her husband was incompetent was initially met with hostility by Donald Sterling's attorney, Max Blecher, who denied his client was in anyway incapable of making decisions. This view was cemented when Donald Sterling filed a lawsuit last Friday against the NBA, arguing the league was unlawfully forcing him out.
Donald Sterling's lawsuit set the table for a long and potentially historic fight with the NBA, but sources confirm the league was decidedly unimpressed by Sterling's legal arguments. Sterling built a case around three basic areas of law that were difficult to conceive as carrying much weight. Sterling argued California privacy law blocked the NBA from using the recording, but the NBA was aware the law only extended to parties to the recording, not third parties like the NBA. Sterling then argued the NBA misinterpreted its own constitution, but the NBA knew it would be afforded wide discretion by a judge in interpreting its own document, especially since Sterling himself contractually consented to league discretion. Sterling lastly raised the always-threatening antitrust law, but the league knew Sterling could likely prove no antitrust injury. Sterling's ouster from the Clippers would likely help, not hurt, the Clippers' standing with consumers.
The NBA was worried even less by Sterling's lawsuit because Shelly Sterling, on behalf of herself and the Sterling family trust, indemnified the NBA from all costs related to Donald Sterling suing the league. In essence, then, if Donald Sterling defeated the NBA in court, he would effectively be paying half of the damages awarded to him: the trust, which he co-owns, and his wife, with whom he shares half of their wealth under California community property law, would be paying him.
The one issue that may have undermined the NBA's legal strategy was if Donald Sterling contested to his wife's account of his mental competence. He could have sued her, arguing she lacked the legal right to take over the Sterling family trust. If a court found she lacked the legal capacity to sell the team, then her sale of the Clippers to Ballmer would have been jeopardized. But apparently Donald Sterling, who is 80 years old, reasoned that such a battle was not worth his time, energy and expense, especially when compared to a $2 billion payout.
Silver's newfound power will help him with other issues
Silver's ouster of the notoriously litigious Donald Sterling with essentially no resistance, while simultaneously raising the value of all NBA teams through the Clippers' $2 billion price tag, was masterful. It cements his authority over the NBA, and Silver will likely use his newfound capital to pursue his original agenda items, with raising the NBA's age limit to 20 years old at the top of the list. Raising the age limit will require negotiation with the National Basketball Players' Association once the union selects a new executive director. But Silver has built goodwill with prominent NBA players, including Lebron James (who ironically entered the NBA out of high school), and that should help him obtain his goals, including an elevated age limit.
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.