The CBA Glossary

An explainer thing for the NBA's Collective Bargaining Agreement

Return to Index « #30 - Tampering #32 - Collusion »

Cap circumvention

The NBA’s Collective Bargaining Agreement contains an article - Article XIII - which seeks to define both the nature of, and punishment for, “circumvention”. And if for whatever reason you were hearing this term in the news cycle surrounding your favorite NBA team right now, it probably behoves everyone involved to get fully up to speed on what that Article XIII says - and what possible punishments might befall any team found to be engaging in the practice.

General prohibition Specifically prohibited conduct Player-coaches Endorsements Payments to retired players Charitable contributions Penalties The Kawhi Leonard thing

General prohibition

Cap circumvention, as the name suggests, is conduct designed to circumvent the salary cap. It is distinct from tampering (the practice of a team’s representatives speaking to players on rival teams to attempt to lure them to join their team) and collusion (coordinated behavior between multiple parties to manipulate the market or avoid competition). Section I of Article XIII lays out the general prohibitions of the practice.

Specifically prohibited conduct

The CBA cannot pre-emptively legislate for everything, because not everything is forseeable. But it tries, and expressly prohibits multiple potential means of cap circumvention in Section 2. Prohibited behaviour includes:

● Each owns 12.5% or less of the business.

● Their investments are independent (i.e. not coordinated or discussed with each other)

● The business opportunity did not come from one to the other (i.e. the team affiliate did not give the player the deal, or vice versa).

● Both are purely passive investors with no management or control role.

To illustrate that by way of example, If both a player and a team owner's investment fund independently buy small stakes in the same startup, this is generally allowed. But if a team executive invites a player to buy into a private company as a reward for signing with the team, it is a violation.

Player-coaches

Supp

Endorsements

a Min

Payments to retired players

The CBA also seeks to prevent teams from paying players after retirement as a disguised reward for past discounts. That is to say, they are trying to get out ahead of any conversation along the lines of “we will pay or have paid you less than you could have earned during your career, but we will make it up to you after you retire.”

For all the details of the above, it should hereby be noted that I do not know of a single instance in which it has happened. If ever it did, it will have been decades ago.

Charitable contributions

The CBA is careful to prevent teams and players from using charities as indirect payment channels.

Penalties

If cap circumvention is found, by inference or express conduct, the question then becomes - what powers do the NBA have to penalize those involved? And the short answer is - quite a lot. The NBA Commissioner has a menu of punishments: big fines, draft pick loss, contract cancellation, suspensions, and bans on future deals.

Section 3 of Article XIII lays out the authorized punishments. For those found in violation of Section 1, the aforementioned “General Prohibitions”, the punishments can be as follows:

For those found in violation of Section 2, the “No Unauthorized Agreements” section, the punishments can increase to the following:

(* the proceeds of all fines are split evenly between the NBA and a charity fund chosen by the Player's Association)

It is not necessarily the case that all those punishments will be imposed. Rather, those are the options and the upper limits, to be utilised at the discretion of the NBA.

Teams can be found in violation of both Sections 1 and 2, therefore receiving punishments for both - for example, if a team knowingly underpays a player in a contract (a Section 1 violation, as it is conduct designed to circumvent the salary cap), and also secretly promises him an off-book endorsement deal with a sponsor (a Section 2 violation involving an unauthorized agreement). Alternatively, they can be found in violation of Section 1 only, in the event that their conduct violates both the broad “spirit” rule (Section 1) but not the specific “side deal” rule (Section 2).

The extent of the above penalties would be harder to fathom, perhaps, had it not already happened once before.

In the offseason between 1998 and 1999 - which, due to the lockout, was actually January 1999 - Joe Smith left the Philadelphia 76ers to sign with the Minnesota Timberwolves for the value of their Mid-Level exception (which at the time was $1.75 million). Smith and the Wolves made an under-the-table agreement that he would play under three consecutive one-year contracts at below market value, thus building up to full Bird rights (which take three seasons to fully accrue), whereafter the Timberwolves would use those Bird rights to sign Smith to a far larger contract beginning with the 2001-02 season.

Smith would re-sign with the Timberwolves in the summer of 1999 to a one year, $2.1 million contract, and would also re-sign in the summer of 2000 to a one year, $2.3 million contract, Unfortunately, right before the start of the 2000-01 season - which would have been Smith’s third with the team - a written agreement to that effect was discovered. Smith and the Timberwolves had not just conspired to circumvent the salary cap, and knowingly underpaid Smith at a time when they could not afford it on the mutual agreement that they would knowingly overpay him later when they could - they had expressly written down that they were going to do it. (Refer back to Section 2(a)(i) above.)

This was the first instance in which the NBA had hard evidence in the form of a signed agreement, and then-commissioner David Stern utilized his powers of punishment in a big way. He fined the Timberwolves the then-maximum of $3.5 million, took away their next five first-round draft picks (two were later returned when the Wolves were deemed to have suffered enough), voided Smith’s then-current contract, and forced Wolves owner Glen Taylor and general manager Kevin McHale to take leaves of absence. Smith’s Bird right status was also revoked, and he would go on to sign with the Detroit Pistons instead.

To date, this is the only such piece of precedent in NBA history. It is a well-documented one, and it has operated as the deterrent that Stern was hoping it would be. Any team therefore found to be engaging in circumvention behavior cannot therefore in good faith claim to have been unaware of the powers of punishment that the league has at its disposal, and their precedent for using it.

The Kawhi Leonard thing

You will probably have heard about the investigation into whether the Los Angeles Clippers engaged in salary cap circumvention when

End-of-season certification

Whenever a player signs a contract, extension, renegotiation or amendment - everything except a 10-day contract, basically - the team official, the player, and the player�s agent must each swear under penalty of perjury that everything the player is receiving from the team or its affiliates is fully contained in the written contract. They must also swear that there are no hidden agreements of any kind outside the contract, including any promises about future contracts or extensions, any extra compensation or benefits not written into the deal, or any investment opportunities or business arrangements offered as an inducement to sign. The idea is to eliminate any side deals or informal understandings that could undermine salary cap rules or free agency rules. ⓘArticle XV (Certifications) Section 1 (Contract Certification):

(a) Every Player Contract (other than a 10-Day Contract), or any Renegotiation, Extension, or other amendment of a Player Contract, entered into during the term of this Agreement shall be accompanied by a certification, sworn to separately by (i) the person who executed the Player Contract on behalf of the Team, (ii) the player, and (iii) any player agent who negotiated the Contract on behalf of the player, under penalties of perjury, that the Player Contract, Renegotiation, Extension, or other amendment sets forth all components of a player’s Compensation from the Team or any Team Affiliate, and that there are no agreements or transactions of any kind (whether disclosed or undisclosed to the NBA), express or implied, oral or written, or promises, undertakings, representations, commitments, inducements, assurances of intent, or understandings of any kind (whether disclosed or undisclosed to the NBA):

(i) concerning any future Renegotiation, Extension, or other amendment of an existing Player Contract, or entry into a new Player Contract; or

(ii) except as permitted by this Agreement or contained in such Uniform Player Contract, involving compensation or consideration of any kind or anything else of value to be paid, furnished, or made available by, to, or for the benefit of the player, or any person or entity controlled by, related to, or acting with authority on behalf of the player; or

(iii) except as permitted by this Agreement, involving an investment or business opportunity to be furnished or made available by, to, or for the benefit of the player, or any person or entity controlled by, related to, or acting with authority on behalf of the player.

The same type of sworn certification is required in certain trades involving players who are in the final year of their contracts. Before the player’s contract is assigned (traded) to another team, the player, the agent and the receiving team must certify that there are no undisclosed agreements with the new team or its affiliates concerning future contracts, extensions, renegotiations, compensation or any other benefits or opportunities. This is meant to prevent teams from making informal promises during trades that are not reflected in the official contract. If the player later signs a new contract or extension within two years of the trade, another certification must be filed confirming that no such hidden agreements existed at the time of the original trade, and this follow-up certification must be submitted within sixty days of the new agreement being executed. If any of the required parties refuses or fails to provide a certification, the NBA is given discretion to approve or reject the trade entirely. (In addition, if the refusal comes from an agent, the players’ union is required to take disciplinary action against that agent.) ⓘArticle XV (Certifications) Section 2 (End of Season Certification):

(b) Prior to the assignment of any Player Contract of a player who is in the last Salary Cap Year of the Contract (or the last Salary Cap Year before the player or the Team has the right to terminate the Contract), the player, the player’s agent, and the Team to which such Contract is to be assigned shall each submit to the NBA a certification, sworn to under penalties of perjury, that other than the Player Contract that has been assigned, or as permitted by this Agreement, there are no agreements or transactions of any kind (whether disclosed or undisclosed to the NBA), express or implied, oral or written, or promises, undertakings, representations, commitments, inducements, assurances of intent, or understandings of any kind (whether disclosed or undisclosed to the NBA), between the player (or the player’s agent or any person or entity controlled by or related to the player) and the Team to which the Player Contract is to be assigned or a Team Affiliate of the Team to which the Player Contract is to be assigned concerning (i) any future Renegotiation, Extension, or other amendment of the Player Contract that has been assigned, (ii) any future Player Contract, or (iii) an investment or business opportunity or compensation or consideration of any kind or anything else of value to be paid, furnished, or made available by, to, or for the benefit of the player or any person or entity controlled by, related to, or acting with authority on behalf of the player.

(c) If a player, within two (2) years after the assignment of such player’s Player Contract, enters into a new Player Contract, or any Renegotiation, Extension, or other amendment of the Player Contract that had been assigned, the Team, the player, and the player’s agent shall each submit to the NBA a certification, sworn to under penalties of perjury, that, at the time of the assignment, other than the Player Contract that has been assigned, or as permitted by this Agreement, there were no agreements or transactions of any kind (whether disclosed or undisclosed to the NBA), express or implied, oral or written, or promises, undertakings, representations, commitments, inducements, assurances of intent, or understandings of any kind (whether disclosed or undisclosed to the NBA), between the player (or the player’s agent or any person or entity controlled by or related to the player) and the Team to which the Player Contract has been assigned or a Team Affiliate of the Team to which the Player Contract has been assigned concerning (i) any future Renegotiation, Extension, or other amendment of the Player Contract that has been assigned, (ii) any future Player Contract, or (iii) an investment or business opportunity or compensation or consideration of any kind or anything else of value to be paid, furnished, or made available by, to, or for the benefit of the player or any person or entity controlled by, related to, or acting with authority on behalf of the player. Such certification shall be submitted to the NBA no later than sixty (60) days following the execution of such new Player Contract, or any Renegotiation, Extension, or other amendment of the Player Contract.

(d) If an agent, player, or Team fails or refuses to provide a certification called for under this Article XV, the NBA shall have the option, in its sole discretion, to approve or disapprove the transaction in question. In the case of a failure or refusal by an agent, and whether the transaction in question is approved or disapproved, the Players Association shall take appropriate disciplinary action against the agent.

General prohibition Specifically prohibited conduct Player-coaches Endorsements Payments to retired players Charitable contributions Penalties The Kawhi Leonard thing

MAIN TAKEAWAYS:

- Teams cannot make side deals to avoid the salary cap, rookie scale, free agency rules, etc.

- Teams cannot disguise basketball pay as a “business partnership” (like a sponsor overpaying a player for an endorsement when really it is just hidden salary).

- Teams cannot give financial inducements to players who are not under contract, unless the CBA specifically allows it.

- If they do, the punishments can be severe.