June 06, 2014
NBA showdown with Donald Sterling as Contracts Case Study
Posted by Erik Gerding

The ugly Donald Sterling episode seems to be moving to resolution with a pending sale of the L.A. Clippers to Steve Ballmer.  The sordid story makes for a great case study in a Contracts course, not least because of the wealth of material that is publicly available, particularly one of the central contacts – the NBA “Constitution and Bylaws.”  Often the key contracts in the most notorious disputes are kept confidential, with only snippets of the agreements available even via court dockets.

Under the terms of the Constitution and Bylaws, the NBA Commissioner position that Sterling could be forced to sell his team was strong but not (pardon the pun) a slam dunk (see Michael McCann’s early analysis here and an analysis of Sterling’s response here).

The Commissioner and Sterling each were aiming to persuade a motley group of NBA owners, who may have been concerned with, among other things, the outrage of players and fans towards Sterling, the damage to their league of having Sterling continue as owner, and the precedent of forcing an owner to sell.

Layered on top of this were the family law and tax considerations of Sterling transferring ownership whether to his estranged wife or to a buyer.

In the end, economics pushed Sterling to sell.  He was faced with a stark choice of trying to hang on to an asset that was damaged goods just by remaining in his hands versus over a billion dollar profit from selling. 

In teaching this episode, students should be cautioned against jumping immediately to the “of course he will sell” conclusion.  The hard work of analyzing the contracts helps explain the negotiating positions of the NBA commissioner, the various NBA owners, Sterling, and his wife as they bargained in the shadow of the law.  The contractual language also will help prepare for any post-sale litigation;Sterling has already initiated one suit and threatened more . Sterling's wife apparently agreed to indemnify the NBA against legal challenges by her husband, which adds yet another teaching wrinkle. One puzzle for students: what was the strategy behind declaring Sterling incompetent?  

Too bad I am not teaching Contracts in the fall.

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