Source: http://www.pkhammarlegal.com/blog/post/forcing-sterling-to-sell-a-look-at-the-nbas-corporate-organizational-structure
Timestamp: 2017-10-19 00:04:07
Document Index: 160594793

Matched Legal Cases: ['§ 1291', 'Art. 35', 'Art. 3', 'Art. 24', 'Art. 35', 'Art. 13', 'Art. 13', 'Art. 35']

Forcing Sterling to Sell: A Look at the NBA’s Corporate Organizational Structure
In the wake of the Donald Sterling scandal, in which the LA Clippers’ owner was outed for racist comments made to his ill-chosen confidante and alleged mistress, the National Basketball Association issued the harshest set of sanctions in the league’s history. Sterling’s punishments include a lifetime ban from attending NBA events, a $2.5 million fine, and a vow from NBA commissioner Adam Silver that he will try to convince the other 29 owners to vote and force Sterling to sell his team. With Silver’s public threat to force a sale have come questions regarding the powers of the Commissioner over the League, and the League upon its owners. To answer those questions, one needs to examine the NBA’s organizational structure and the relationship between the League and its owners.
The Structure of the National Basketball Association
The NBA has grown from being primarily a means of regulating and organizing a fledgling sport into a highly-sophisticated business powerhouse with yearly profits in the hundreds of millions of dollars[i]. As such, many would expect the NBA to have a unified corporate structure. Instead, it has retained a specialized organizational model involving individual teams acting in concert and following an agreed-upon set of rules when necessary.
Specifically, the NBA is currently an unincorporated joint-venture with limited membership and a franchise system[ii]. A joint venture is a legal organization in which multiple actors act in concert for mutual profit. Each team in the NBA is owned as a franchise, meaning it is licensed to associate itself with the League and operate according to the methods and procedures prescribed by the NBA. While the NBA’s Constitution and Bylaws state the League is not to be run for profit, it is not a 501(c)(6) nonprofit like the National Football League, and therefore pays taxes on its earnings. Team owners also equally own a corporate entity, NBA Properties, which has exclusive control over licensing for the NBA League and teams, and is the owner of the League’s intellectual property rights[iii].
This less-than-united form recognizes the fact that the NBA’s franchises act both collaboratively and competitively depending on the circumstances. For example, all franchises work together to develop and enforce common rules for the game and the League, including draft rules and salary caps (collaborative), but also play games to defeat one another and draft players to improve their strength relative to the other franchises (competitive). This form has also been kept, no doubt, because of legal and judicial benefits which give owners significant tax benefits[iv] and that prevent sports leagues from facing certain anti-trust violations[v].
Leadership, Membership, and Decision-making
The NBA Constitution and Bylaws set out the principles, powers and limitations of the League and its members. Every contract between a member and its owners, officers, managers and coaches must require that it be governed by the constitution and bylaws and any other rules, regulations and agreements of the Association[vi]. The Constitution also sets forth the organizational structure of the NBA.
The NBA is headed by a Commissioner who serves as its Chief Executive Officer (CEO), and is subject to the control of the Board of Governors. Each franchise has one appointed representative, usually the team owner, which sits on the Board of Governors[vii]. Unlike in a corporation, where stock ownership by officers and board memberships is encouraged if not required, the Commissioner and board members are explicitly prohibited from lending money or owning financial interests in franchises which are not their own, unless specifically disclosed and approved[viii]. Cross-ownership of teams is prohibited to prevent game rigging and conflicts of interest that might undermine the integrity of the League. In other ways, the Board of Governors operates similarly to a corporate board of directors by deciding on policy and rules to govern the entity by vote.
Outside of the NBA’s internal leadership structures, the NBA is composed of its Members. Membership grants the rights to organize and operate a professional basketball team to play in the League operated by the Association. Therefore, each Member is an entity which controls one franchise with a team, its Governor, owner, players, and associated employees[ix]. A Member may be an individual or an organization, like a corporation or an LLC. Members join the NBA by filing an application and a $1,000,000 application fee, and are added to the League, after application, if three-fourths of the Board approves. If a Member violates the NBA Constitution or Bylaws, it may be removed by a three-fourths vote in favor. These termination provisions will be of vital importance in any attempt at ousting Donald Sterling from his ownership of the team.
The Case of Donald Sterling
As stated above, by being a team owner, Donald Sterling is subject to the authority of the League by contract. When he became an owner, he made himself subject to the NBA Constitution and Bylaws.
The Commissioner, currently Adam Silver, is charged with the power to levy fines, suspensions and other sanctions against those subject to the League’s control. Against owners like Sterling, the size of fines for misconduct varies based on the situation. Sterling’s fine of $2,500,000 is the highest available for a situation “which is not covered in the Constitution and By-Laws.[x]” The amount of a fine may be as high as $5,000,000 in other cases, such as tampering with games, which more directly impact League operations[xi].
The final question is whether Adam Silver, as Commissioner, can force Sterling to sell the Clippers. The NBA has authority to do so, either individually through Silver or with approval of the NBA Board of Governors, but Silver has been cryptic about how he hopes to force a sale. When asked, he confidently stated, “Let's just leave it that we have the authority to act as I've recommended.” Silver likely seeks to utilize a Constitution provision which states that the interest of an owner "may be terminated by a vote of three-fourths of the Board of Governors" in certain situations. The first cause for termination is as a result of a Member who “willfully violate[s] any of the provisions of the Constitution[xii].” As Sterling’s comments were given in private and are not the type of behavior specifically targeted by any part of the Constitution, Silver is likely to look elsewhere. The most likely option is for termination when a Member “Fail[s] or refuse[s] to fulfill its contractual obligations to the Association, its Members, Players, or any other third party in such a way as to affect the Association or its Members adversely[xiii].” However, it is unclear what "contractual obligations" Silver will claim were breached. While the Constitution allows fines and suspension of persons making statements "prejudicial or detrimental to the best interests of basketball or of the Association or of a Member or its Team," even a violation of this provision is unlikely to be a failure or refusal to fulfill contractual obligations as long as the fine is paid and suspension respected. [xiv]
Regardless of the precise method of seeking termination chosen by the Board of Governors, a suit by Sterling seems likely – a move that makes sense when one considers that the LA Clippers’ franchise value has changed under Sterling from $12 million in 1981 to between $405 million $575 million today – and would likely sell for up to $1 billion. As such, the courts may have an opportunity to comb over the finer points of the Constitution and Bylaws in the months and years to come.
[i] Michael McCann, The NBA and the Single Entity Defense: A Better Case?, 1 Harv. J. of Sports and Ent. L. 40, 41-42 (2010).
[ii] Id. at 69.
[iii] McCann, 1 Harv. J. of Sports and Ent. at 48.
[iv] Gregor Lentze, The Legal Concept of Professional Sports Leagues: The Commissioner and an Alternative Approach from a Corporate Perspective, 6 Marq. Sports L. Rev. 65, 67 (1995).
[v] 15 U.S.C. § 1291, 1294 (1994) (exempting the NBA from anti-trust laws for agreements regarding sports broadcasts).
[vi] Const. and Bylaws of the NBA, Art. 35A (2012) (hereafter “NBA Const.”), available at http://mediacentral.nba.com/media/mediacentral/NBA-Constitution-and-By-L....
[vii] McCann, 1 Harv. J. of Sports and Ent. at 49.
[viii] NBA Const., Art. 3.
[ix] Id. at Interpretation, 2.
[x] Id. at Art. 24(l).
[xi] Id. at Art. 35A.
[xii] Id. at Art. 13(a).
[xiii] Id. at Art. 13(d).
[xiv] Id. at Art. 35A(b-c).
Posted on 01/08/2014 at 11:45:00 AM