NBA Collective Bargaining Agreement – Part One

Billy Hunter, executive director of the National Basketball Players Association, and David Stern, NBA Commissioner, answer questions about the pending labor negotiations during the NBA Finals.

Introduction

“I heard the NBA is going to have a lockout, but I am not sure what that means or why it’s happening.”

A similar thought has probably crossed your mind throughout this season. However, if you are like me, you have tried to block out any thoughts of a lockout because of the Thunder’s amazing postseason run and overall awesomeness of the 2010-2011 NBA season. Now that the season has concluded, this will be the prevailing topic on which the media focuses this summer (certainly so after the NBA draft). The Thunder likely will not make any big splashes on draft night (although you never know with Mr. Presti running the show), so the big question hanging over the heads of Thunder fans is “will there even be a 2011-2012 season?!”

I wish I knew the answer to this question. My gut feeling is that there will be a lockout and it will last into training camp and pre-season, but a deal will get done before any regular season games are missed. However, your guess is as good as mine at this point. The purpose of this article is to give Thunder fans some context to collective bargaining negotiations, so that you can better understand the ever-evolving and complex situation. First, you must understand how we got to this point.

What is a collective bargaining agreement and why must they have one?

Before I can answer that I need to give you a quick Antitrust Law lesson (don’t worry it will be painless). There is this law called the “Sherman Act” that was passed over 120 years ago, which is still in effect. Its purpose is to protect competition in the marketplace. Basically, the law makes it illegal for competitors to make agreements that harm competition. For example, let’s say the CEO of Coca Cola and the CEO of Pepsi call each other up on the phone and have the following conversation:

Coca Cola CEO: “Hello Mr. Pepsi, Coca Cola is tried of competing with Pepsi. We want to make more money, so how about instead of charging $1 for a can of soda, we both agree to sell our cans of soda for $2”

Pepsi CEO: “That’s a great idea, Mr. Coca Cola! We would both make a TON more money! You have a deal!”

An agreement to raise prices would clearly be harmful to consumers and competition. We do not want businesses engaging in this conduct; therefore the Sherman Act makes it illegal. The Sherman Act makes illegal much more conduct than just explicit agreements to raise prices – any agreement by competitors that restrains competition is illegal.

Okay, now that you are antitrust scholars you can understand why collective bargaining agreements are needed.

The NBA is made up of 30 individual businesses – each NBA team.  Every team is considered to be in competition with each other, which makes sense because they are offering very similar products. Without a CBA in place, the rules agreed to by the teams regarding player salaries, salary cap, player trades, etc. would be considered agreements that restrain competition and would violate the Sherman Act.

This is why the CBA comes in handy. A collective bargaining agreement is a tool used by unions and their employers to get around antitrust problems. If the players and owners agree to a certain set of rules, the courts consider it a labor issue and not an antitrust issue (a few other conditions must be met as well, but they are a little confusing and not important to understanding the overall concept). So the NBA, along with almost all other major sports, uses a CBA to avoid antitrust problems. This also illustrates why a season cannot be played without a CBA in place – because it would violate antitrust laws.

Why can’t the players and owners just extend the current agreement?

The simple answer is they can extend it, but they won’t. More accurately, the owners won’t.  I am fairly confident that the players would be perfectly happy extending the terms of the current CBA. However, it takes two to tango, as the saying goes. The owners want changes – big changes that the players currently do not wish to accept. There have been ongoing negotiations between the two sides since the beginning of the season, but lines in the sand have been drawn. We are only weeks away from a lockout and there are hardly any signs of progress.

To understand why the owners want such large-scale changes to the current agreement, we must explore the roots of the current CBA.

In 1998, the NBA owners reopened the league’s collective bargaining agreement seeking changes to the league’s salary cap and limits on players’ salaries. Prior to 1998, the league did not have upward monetary limits on player contracts. Today, analysts say that a certain player is a “max contract player,” but that nomenclature has only developed over the past decade since maximum player contracts were agreed to during negotiations. Previously, a team could pay its own players as much as it wanted.  A team could do this because of a salary cap exception called the “Larry Bird exception,” which is still in the current CBA. This exception allows a team to spend above the league-wide salary cap to resign its own players. Because there was no upward limit on player salaries, a player like Michael Jordan earned a little over $33 million during the 97-98 season (for comparison, this season’s highest-paid player was Kobe Bryant who earned a shade under $25 million).

These escalating salaries were a large cause of concern for owners. The more money that went to player salaries, the less money found its way to the owners’ pockets. Basketball Related Income (BRI) essentially includes any income received by the NBA: gate receipts, broadcast rights, concession sales, percentages of luxury suites, ect. By 1998, the players were receiving over half of the BRI total.  The owners sought to control this upward tick by asking for large-scale changes to the existing CBA.  Very similarly to the 2011 negotiations, the players resisted the changes proposed by owners.

In the summer of 1998 after a deal was unable to be reached, the owners locked out the players. After two months of the season had already been canceled, Commissioner David Stern set a deadline of January 7, 1999 on which he would recommend the cancellation of the entire season if no deal was reached. A day before the deadline, the owners and players reached an agreement that included several important components:

  1. It capped player salaries
  2. Instituted a rookie pay scale
  3. Retained the “Larry Bird exception”
  4. Added several new salary cap exceptions

This agreement was seen as a victory for the owners but the shortened season had lasting effect on the league’s popularity. Ticket sales and television rating dropped and remained low for three seasons following the lockout (plus, it didn’t help that Jordan was in the middle of his second retirement during this time).

The NBA operated under the 1999 CBA until 2005, which is when the deal was set to expire. The owners again wanted changes to player salaries. However, the 2005 CBA was negotiated in light of the 2004-2005 National Hockey League lockout, which wiped out the entire NHL season. Unlike 1998, the NBA owners and players came to an agreement quickly, a six-year deal which favored the players (and expires this July). In a story for espn.com shortly after the agreement was announced Marc Stein wrote:

“Stern called it ‘a 50-50 deal’ at the dais, but it sure doesn’t look that way at first glance. These things are always easier to judge down the line, after the loopholes no one can see today are exposed, but what we know for now is that many of the initiatives that were important to league owners – based on everything we’ve been told all season – didn’t come close to passing.

Guaranteed contract lengths were reduced by only one season, compared with the three-year reduction teams were seeking. Year-to-year raises were only reduced marginally, too. Those are indeed concessions from the players’ end, but Stern and his negotiators also agreed to raise the salary cap by a healthy $5-to-$7 million.

Add that cap increase to a series of mathematical tweaks explained at length by my colleague Chad Ford and you’re bound to see teams spending more liberally this off-season and in subsequent off-seasons. Especially because the league also lessened the impact of the luxury tax, after longstanding whispers the new tax would be more stringent.”

Mr. Stein’s prediction about “teams spending more liberally” has proven accurate – evidenced by last summer’s max-contract-spending-spree. However, the provision in the 2005 CBA that the owners most regret conceding would likely be the express agreement to give players no less than 57 percent of the BRI total. This was the first time the league has ever agreed to guarantee the players an agreed-upon percentage of revenues.

In the current negotiations, the owners feel like they gave too good of a deal to the players in 2005, and the players are unwilling to give back any benefit they received from previous negotiations. Therefore, the two sides are at a stalemate.

In part two, I will discuss the status of the current CBA negotiations and explore the most important issues involved.

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About Jason Hines

I'm a recent law graduate for Oklahoma City University. I have a passion for sports, journalism, and law. I use this blog as a tool to engage in all three. View all posts by Jason Hines

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