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Friday, September 3, 2010

The Next NHL Player Strike: Kovalchuk Revisions Destroy Player Trust

Reportedly, hockey star Ilya Kovalchuk's 15-year contract (for US$100 miillion) with the New Jersey Devils will be approved by the National Hockey League ("NHL").  However, the background of the negotiations between the league and its players' union (the "NHLPA") show that the NHL cannot be trusted to live by the contracts it itself negotiated. 

Make no mistake.  The NHL's message to players is this:  We can change your contract at any time without your permission.  (Now the players know how the fans - regular consumers and small business owners - feel when they deal with the banks.)  Of course, this unilateral power is one-sided; the players have no such right.

Non-hockey fans should also be aware that team owners already had the right to cancel contracts after players had signed and started playing -- performing -- under them.  The current collective bargaining agreement (the "CBA") signed in 2005 allows teams to "buy out" players' remaining years on their contracts at two-thirds of the remaining value (this means teams can save 33%, but don't get any more services) and furthermore, get to pay out that remaining value over a time period which is double the remaining term.

For example, the New York Islanders gave a 15-year, $67.5 million contract to former Olympian and All-Star goaltender Rick DiPietro in 2006.  Since then, DiPietro became an All-Star in 2008 -- then he got hurt during the All-Star Game skills competition and has rarely played since.  If the Islanders want to buy out the remaining 11 years of his contract, they would get to pay him $33 million (instead of $49.5 million remaining) total, and that amount would be paid out over 22 years.  For the current year, that would represent a true savings of $1.5 million plus a deferral of another $1.5 million.  If bought out, DiPietro would get only one-third of what he signed up for ($1.5 million instead of $4.5 million), and eventually would get another $1.5 million, deferred, thus losing the time value of that money.  DiPietro could, however, then be free to sign with another team and get that salary contract (which is subject to the same buyout risk) in addition to the payout under his Islanders contract.

Clearly, there are risks here to the players.  (And I must add: the 2005 CBA also automatically reduced every preexisting player contract's dollar value by 28%.)  But now, the Kovalchuk contract saga has shown the NHL is willing to challenge players' contracts, even after they've signed them, started playing and taken the risk of serious, career-ending injuries. 

The resulting erosion of trust which players must be feeling poses a grave risk of another labor stoppage (aka: a lockout of players by owners), just like what happens in 1994 (costing the league half of that season) and 2004-05 (when the entire season was cancelled before players agreed to a salary cap).

An earlier Kovalchuk-Devils contract for 17 years and $102 million, signed this past July, was rejected by the NHL on the premise that it was an improper circumvention of the league's salary cap as provided for by the latest CBA. Such a definition is reportedly not in the CBA (for what reason, I speculate below), but the league's interpretation will now be accepted by the NHLPA which has agreed on amended terms to the rules governing long-term player contracts.

This brings up an issue of the value of any business contract. The contract's purpose is to bind the parties and express the parties' shared understanding of their relationship, what will be performed, what conditions must be met, and so on. A good contract should have well-defined provisions and account for foreseeable events or contingencies, so as to avoid or minimize the risk of future disputes and their attendant costs (such as litigation). Of course, some parties may secretly wish for a contract to avoid addressing a particular situation. Some parties may want flexibility, or may not mind having some provision be subject to interpretation, as that may give them the opportunity (or excuse) to renegotiate the deal.

In light of these principles, was the collective bargaining agreement between the NHL and NHLPA a good contract, or was it purposefully drafted to be ambiguous? I speculate that it was the latter.
This strategy may work for the NHL (although players will remember that their league has essentially argued that it is able to renegotiate a deal after the players have begun to perform under it. The concept of a right to renegotiate is tricky and should - and absolutely can - be spelled out in the initial contract. The failure of the original CBA to do this suggests the league had a deceptive intent in mind when it negotiated the original deal.

The specter of one party -- here, the NHL - having a unilateral right to renegotiate a player's contract, including after he's performed under it (as Chicago's Marian Hossa and Boston's Marc Savard have done) will cause players to negotiate future contracts with this risk in mind. The Kovalchuk-induced CBA revisions may be a "win" as perceived by the NHL, but player suspicions as to league underhandness and deceptive intent will be sure to increase the distrust among player ranks, and ultimately increase the risk of a labor stoppage / player strike in 2012 when the current CBA expires.  Contracts may contain many things, but without mutual trust, they often are worth little more than the paper on which they are printed.

Eric Dixon is a New York corporate lawyer with substantial experience negotiating business transactions. He can be reached at
edixon@nybusinesscounsel.com.

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