NBA

Donald Sterling’s Legal Strategy Makes Little Sense

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The Donald Sterling saga took its latest turn with reports Thursday that Sterling was refusing to pay the $2.5 million fine levied by Adam Silver. The initial reaction by many was, essentially, of course he didn’t. If he is going to fight the termination of the franchise, why not fight the fine too? The reason is that Sterling has almost no legal argument to contest the fine, and that failing to pay the fine makes his contention that he did not violate the NBA Constitution far more difficult.

Sterling previously had an uphill climb to retain control of the team, but he at least had an argument that his racist comments did not violate the express provisions of Article 13 of the league’s constitution, which sets out the criteria under which ownership may be terminated. From all reports, it appears that the league will argue that Sterling failed to adhere to contracts* in a way that hurt the league under Article 13(d).

*Reports have indicated that, among other things, Sterling signed a number of agreements with the league that contained morals clauses that the comments violated. The enforceability of such clauses is a whole separate issue that I have not yet researched.

But by failing to pay the fine, Sterling makes the league’s case much easier. Under Article 13 Section C, failure to pay a fine is grounds for franchise termination in and of itself. Specifically, a franchise may be terminated if it:

Fail[s] to pay any dues or other indebtedness owing to the Association within thirty (30) days after Written Notice from the Commissioner of default in such payment.

If Sterling does not pay the fine, there is no ambiguity about whether he is violating this section.

What about arguing, as it seems Sterling will, that Adam Silver did not have the authority to impose this fine? Under the NBA Constitution, that argument is very difficult because Article 24(l) gives Silver “the authority to fix such penalty as in the Commissioner’s judgment shall be in the best interests of the Association.” Such a penalty may include “a fine, suspension, and/or the forfeiture or assignment of draft choices. No monetary penalty fixed under this provision shall exceed $2,500,000.”
The penalty imposed by Silver is of course within these guidelines, so Sterling really has no argument that Silver could not determine or levy this fine because his agreement to the NBA Constitution empowered Silver to do so.

By failing to pay the fine, Sterling has essentially changed his argument from the somewhat reasonable (in a legal sense) contention that making racist comments is not “failing or refusing to fulfill contractual obligations…in such a way as to affect the Association or its Members adversely” to the far worse argument that Silver was not empowered to levy the fine.

The League is Getting Its $2.5 Million

But at least Sterling gets to keep his $2.5 million, right? Not really:

(j) The Commissioner shall be empowered to withhold all revenues due to any Member in the event that said Member has, in the Commissioner’s determination, failed to discharge its financial obligations to the Association or any Member thereof.

So Silver can simply take the fine out of the Clippers’ revenue, such as the national TV contract (payments on which the league disburses) or any other revenues since the league has taken effective control of the franchise.

Paying the Fine is Not an “Admission of Guilt”

Some have argued that paying the $2.5 million would have constituted an “admission of guilt.” This argument is a bit of a canard, as “guilt” is not really the standard we are dealing with here. Sterling is not claiming that he did not make these racist comments, and he certainly cannot claim that it was not him in that disastrous appearance on Anderson Cooper 360.* Paying the $2.5 million does provide some legitimacy for Silver’s decision to fine him, but as we have discussed the standard governing the fine is much different than what would be required to take away the team. Having paid the fine would not have hurt Sterling’s legal argument to keep the team in the slightest.

*Marv Albert described his comments as “deLUsional” during Tuesday’s Game 5, as only he can.

Sterling Already Missed His Best Chance to Keep the Team

Once the comments were made, the strategy should have been to express immediate contrition publicly and privately (to the other owners and the commissioner) in the broadest and most unequivocal terms. In addition to potentially reducing Sterling’s penalty, this would have helped with the reality that sponsors, players and fans would at some point need to be mollified for Sterling to keep the team even if he were to win a lawsuit against the league and retain control. Without an effective apology, the practical implication of Sterling continuing to own the team would likely be sponsor, player and fan boycotts.

In fact, had the Clippers’ players boycotted games (or if they do so in the future), that would constitute an even more express violation of Sterling’s basic contractual obligations, namely actually having his team show up to play. This failure could provide grounds for franchise termination under Article 13(d), as well as subjecting Sterling to up to a $2.5 million payment to the opposing team AND up to a $5 million payment to the league per missed game under Article 36 of the NBA Constitution.

Apologizing and paying the fine would have been the rational approach to maximize Sterling’s chances of keeping the team, however minimal they might have been once the comments were made. Of course, the issue is that rational people don’t make the comments Sterling made to begin with.

Sterling’s Due Process Argument Makes No Sense When the Process Has Not Yet Concluded

The letter referenced by Sports Illustrated reportedly argues that Sterling’s “due process” rights have been violated. As SI’s Michael McCann points out, Sterling’s right to due process is much more limited by the NBA’s “justice system” than it would be with a public agency or in a courtroom because Sterling agreed to be bound by the procedures of the private association. Without the full text of the letter, it is difficult to know whether Sterling is challenging just the fine and suspension at this juncture or also the upcoming forced sale of the team. If it is the latter, it is difficult to see how a due process argument applies when the NBA’s process to force the sale is not even complete yet.

Sterling Already Faced Three Enormous Hurdles Before Refusing to Pay the Fine

The next part of the procedure is that three-fourths of the NBA Board of Governors will presumably vote to terminate Sterling’s franchise, putting the franchise under league control via Article 14A. Had Sterling paid the fine, he may have had somewhat of an argument in a purely factual sense that his comments did not violate any contract. Unfortunately for Sterling, he doesn’t have much recourse if he disagrees with the Board of Governors’ decision. Any legal challenge to that decision would face three key issues.

Covenant Not to Sue

The NBA Constitution, which Sterling agreed to, contains what is known as a covenant not to sue. That is part of Article 14(j), which reads as follows:

(j) The decisions of the Association made in accordance with the foregoing procedure shall be final, binding, and conclusive, and each Member and Owner waives any and all recourse to any court of law to review any such decision.

That means that Sterling has waived any right sue to the league on this issue. But that does not completely end the inquiry, as case law has articulated two narrow exceptions even where an owner has made such an agreement. However, those are unlikely to apply. They are if “(1) the rules, regulations, or judgments of the league are in contravention to the laws of the land or in disregard of the charter or bylaws of the league, and (2) the association has failed to follow the basic rudiments of due process of law.”* It is hard to see how the NBA’s actions will fall into either of those exceptions, so long as it follows its own procedures outlined in Article 14, which it surely will.

*That language is from a 1970s case, Charles O. Finley & Co. Inc. v. Bowie K. Kuhn, when the former A’s owner sued Major League Baseball.

The Board’s Decision is Treated Like an Arbitration Award

Nevertheless, let’s assume that Sterling gets over the covenant not to sue. The next issue is that the league’s decision is only reviewable by the court the way an arbitrator’s decision would be. Under Article 18(e):

(e) All actions duly taken by the Board of Governors shall be final, binding and conclusive, as an award in arbitration, and enforceable in a court of competent jurisdiction in accordance with the laws of the State of New York.

In layman’s terms, the league’s decision gets treated by the courts as if the two parties already went to arbitration and the arbitrator ruled. When that happens, there is very limited recourse for the losing party. Sterling would have to argue one of four things: 1) there was corruption, fraud or misconduct in procuring the award, (2) partiality (i.e. bias) of the arbitrator, (3) the arbitrator exceeded his power, perhaps by showing a “manifest disregard for the law,” or (4) the award violates public policy. It is hard to see how Sterling might argue the decision falls into any of these exceptions, and even if he could the practical reality is that arbitration awards are almost never overturned. The law has a policy for preferring private arbitration when parties so agree, as Sterling and the league have, with the goal of keeping disputes out of the courts when possible.

How might this play out if Sterling sues anyway? Shortly after Sterling filed his complaint, the league would likely file a motion to dismiss the case based on the covenant not to sue and the arbitration clause. If a motion to dismiss is granted, it generally means the case is over before anything like written discovery, depositions or much else in the case even start. It exists for precisely situations like this, where one party (the NBA here) has a legal argument that it can prevail on right away, and thus going through the expense of discovery and trial is unnecessary. The league could very well win that motion, and the case would be over pending an appeal that would have no better odds of success.

Sterling’s Court Case Would Be Very Difficult As Well

Now say Sterling gets over those two hurdles and the case is heard on the merits. How would that play out? Sterling would probably ask for what is known as a preliminary injunction, by which he would ask the court to stop the league from selling the team. An injunction is where a party asks the court to order someone to do something (in this case not sell the team), rather than just award monetary damages as in most cases. A preliminary injunction is one that a court institutes at the outset of the lawsuit, pending the actual outcome of the case at trial. To get a preliminary injunction, i.e. to put the sale on pause before he actually won the case, Sterling would have to convince the judge that he had a) a probability of prevailing on the merits and b) that he would suffer irreparable harm for which money damages could not compensate him if the team were sold.

Neither of these appears likely in this case, so Sterling would face difficulties stopping the sale of the team at the outset of the case via preliminary injunction. Sterling would then be suing for monetary damages only. To get these, Sterling would have to prove the league was wrong to strip him of the franchise–i.e. he didn’t actually violate the Constitution in a way that justified the Board forcing him to sell the team. If he proves that, he would also have to prove damages, that he lost money because of the forced sale. This latter point would prove especially difficult for Sterling, as a) he is going to be amply compensated when the team sells for what will likely be a record price and b) in the alternative scenario in which he retained control of the team it would have been worth much less than after a sale because of the potential for team boycotts and general toxic attitude toward his ownership.* On the contrary, selling the team will likely make Sterling much more money than if he had retained it in the current environment.

*Perhaps the one reasonable argument he might make in this scenario is that he and his eventual estate suffered adverse tax consequences from having to sell the team now instead of after his death.

And finally, did we mention that Sterling would have to convince a jury of 12 people that he deserves to keep the team? Given his history and his handling of the situation to date, that could prove the biggest hurdle of all.

Disclaimer: We do not know all the facts right now, and this analysis is based entirely on publicly available information to date. It is possible that new facts or legal documents could emerge as we go on, but this is my best attempt with the information available.

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About Nate Duncan

Nate Duncan

Nate Duncan is an NBA analyst and attorney. He writes regular features for Basketball Insiders and chats weekly at 11 Eastern on Tuesdays.