Thursday, May 1, 2014

NBA Owner’s Rights, A Sterling Guillotine, Stock for All Clippers & Other Thoughts

The NBA’s handling of what the NBA concluded was Donald Sterling’s now-infamous, racist-language-laden phone call with V. Stiviano has generated a lot of commentary (including my own).  As one might expect, the incident has led to some oft-repeated assertions that are not quite right.  So, in taking a break from my grading, I thought I’d deal with a couple of those issues right now. 

To start, if Sterling is forced to sell the Clippers, the NBA and the other team owners are not “taking” anything away from him that he has a right to keep.  He is an owner subject to an agreement that, according to NBA Commissioner Adam Silver, allows the league to force Sterling to sell upon a three-fourths vote of other league owners.  As such, the league has, and has always had, the power to decide if Sterling would be allowed to own a team.  (Why the league owners didn’t act twenty years ago is a legitimate question, but one for another day.)

 That Sterling can be forced to sell should not be news to lawyers, at any rate.  This case reminds me of Lawlis v. Kightlinger & Gray, 562 N.E.2d 435 (Ind. App. 4th Dist. 1990). The case is taught in many Business Organizations courses. In that case, Lawlis was a partner the Kightlinger & Gray law firm. At some point, his alcoholism became a problem, and eventually he told the partners of his issues. Lawlis and his partners reached an agreement about how to move forward (one with a “no-second chances” provision).  Lawlis got things together for a bit, then returned to drinking, and he was given a second chance.  Lawlis apparently got sober and eventually insisted the firm should increase his partnership participation.  Instead, the firm decided to expel him by a 7-to-1 vote (Lawlis was the sole vote against expulsion).  Lawlis sued. 

The court was not convinced, and I would hope any court would look the same way at a vote to remove Sterling as an NBA owner. Even if they needed cause, I would opine that the league has it, but the likely don't need it.  The Lawlis court explained: 

All the parties involved in this litigation were legally competent and consenting adults well educated in the law who initially dealt at arm’s length while negotiating the . . .  agreements here involved. At the time the partners negotiated their contract, it is apparent they believed . . . the “guillotine method” of involuntary severance, that is, no notice or hearing, only a severance vote to terminate a partner involuntarily need be taken, would be in the best interests of the partnership. Their intent was to provide a simple, practical, and above all, a speedy method of separating a partner from the firm, if that ever became necessary for any reason. We find no fault with that approach to severance.

 Where the remaining partners in a firm deem it necessary to expel a partner under a no cause expulsion clause in a partnership agreement freely negotiated and entered into, the expelling partners act in “good faith” regardless of motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled.

Lawlis,562 N.E.2d at 442-43.

Some have lamented that Sterling will still be a rich man from this, no matter what.  That is true, and the NBA has no way to change that.  Sterling must be properly compensated if he were forced to sell the team. But that’s the point.  In America, Sterling (like anyone else) is permitted (within the bounds of the law) to say racist and misogynist things and be a generally awful person without anyone taking away property.  On the other hand, it appears Sterling agreed to buy a team in a league with an agreement that has a guillotine clause that allows the league to force him to sell.  So be it.

Here are five other related points worth noting (at least, I think so), even if they are not as business-law focused. Click below for more.

(1) If the NBA  does force the sale of the Clippers (as I sincerely hope they do), I think it'd be a nice gesture if the purchasing group gave a share of stock (or a membership unit) to every player who ever played, coached, or worked in the front office for the Clippers. Elgin Baylor gets extra. 

(2) If you are married, and have also a girlfriend, there is a good chance things will get messy.  Just a thought.

(3) Regardless of what you think of Ms. Stiviano, it's not her fault people think Donald Sterling is a racist.  He accomplished that a long time ago, on his own.

(4) In addition, for those who think Sterling was “tricked” into the phone call, you’re wrong.  He didn’t know he was being recorded, but there is no indication he was in any way coerced or duped into saying things he wouldn’t normally say.  Now, if Ms. Stiviano told Sterling she had decided to try out for an acting part, and she needed him to read the part of the “racist boyfriend,” then gave him the script of what he said in the recording, then he would have been tricked into saying those things.  In this case, he said it because it appears that’s how he talks, and while it’s likely a court would not allow such a recording in as evidence, the court of public opinion does not have such a stringent evidentiary hurdle.

(5) Moreover, I don’t think this game of “gotcha” is as bad for other owners or CEOs as some would have people believe.  Although I am  sympathetic to the reality that we all have said things not intended for public consumption that could make us look awful, part of the reason this hit Sterling so hard is that he apparently has no goodwill.  We all make mistakes, but when we generally lead our lives trying to treat others well, we have people in our corner. For those who don’t have such a support system, especially among the wealthy, it is likely their own doing.  Oh, and as a rule, you shouldn’t say racist things even if it’s not intended for public consumption.

(6) Finally, enough with the mistress, bimbo, chick, hussy, gold-digger, etc., talk.  Reinforcing misogyny while decrying racism is inconsistent, counterproductive, and wrong.

[Update: I posted this earlier without having seen the NBA Constitution or By-Laws.  Those are available here. Though it doesn't change my views of much, it does indicate less of a guillotine clause is in place than the NBA could have been chosen.  The key provisions that would allow the league to force a sale of the Los Angeles Clippers are as follows: 

Article 13

Termination of Membership

The Membership of a Member or the interest of any Owner may be terminated by a vote of three fourths (3/4) of the Board of Governors if the Member or Owner shall do or suffer any of the following:

(a) Willfully violate any of the provisions of the Constitution and By-Laws, resolutions, or agreements of the Association.

. . . .

(d) Fail or refuse 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.

Some have argued that Sterling’s behavior does not meet either of the above requirements. I haven't seen all resolution or agreements, so I cannot be sure, though I think even with a quick look the NBA has a case.  I concede litigation is possible (and likely), but I’ll posit one solution for consideration that I think could satisfy either section, though more likely part (d).  

The NBA has a Licensee and Supplier Code of Conduct, which I think clearly provides an indication that Sterling’s conduct would not be permitted of suppliers, and states that that such conduct would not be permitted by the NBA.  I’ll leave it to readers to decide – I'm not drafting the brief right now– but I think it’s a compelling statement that the NBA wouldn’t tolerate discriminatory behavior of a licensee and perhaps even promises its licensees the NBA will not engage in such behavior, either.

 From the licensee code of conduct:

NBA Properties, Inc.

The NBA’s mission is to be the most respected and successful sports league and sports marketing organization in the world. In keeping with this mission, NBA Properties, Inc. (“NBAP”) is committed to conducting its business in a socially responsible and ethical manner. We expect all NBAP licensees, including their contractors, engaged in the manufacture and sourcing of products bearing NBA, WNBA, NBDL and USA Basketball (collectively “Product Suppliers”) to share this commitment. At a minimum, all Product Suppliers must adhere to the following Licensee and Supplier Code of Conduct:

Product Suppliers shall conduct their businesses in accordance with the highest standards of ethical behavior.

. . . .

NBAP will only do business with Product Suppliers whose employees are appropriately compensated, present at work voluntarily, not at undue risk of physical harm and not exploited in any way. In addition, Product Suppliers must comply with the following specific standards: 

 . . .

  • Harassment or Abuse: Product Suppliers shall treat each employee with dignity and respect, and shall not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse.  
  • Nondiscrimination: Product Suppliers shall not discriminate in employment practices on the basis of race, religion, age, nationality, social or ethnic origin, gender, sexual orientation, political opinion or disability.]

Business Associations, Corporate Governance, Corporations, Current Affairs, Joshua P. Fershee, Partnership | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference NBA Owner’s Rights, A Sterling Guillotine, Stock for All Clippers & Other Thoughts:


Post a comment