Could Donald Sterling Win A Lawsuit Against the NBA?

On Monday, NBA commissioner Adam Silver has handed Los Angeles Clippers owner Donald Sterling a lifetime ban from the NBA, along with issuing the maximum allowable fine of $2.5 million. Silver also said that we will ask the NBA owners to essentially kick Sterling out of the league. Since then, there have been lots of articles written proclaiming victory over the evil Sterling and celebrating the end of his reign.

Now, do not mistake this as defense of Sterling; I’m on record far too many times decrying what a colossal asshole he is (here, here, and here for starters).  Nor is this a criticism of Silver’s actions. His hand was forced by a “perfect storm” of circumstances; 30+ years of inaction by the NBA, a firestorm of public outrage, a threatened walk-out by the players, and sponsors bailing out meant Silver really had no choice.  Rather, this is a “warts-and-all” assessment of what might happen, given the assumption that Sterling has a long and litigious history and given that,  forcing him out of the league raises some very problematic legal issues.

This assessment is necessary because we all know there is a distinct possibility that Sterling will sue. Sterling is an attorney, which helps explain why he has a reputation as the most litigious owners in all of professional sports.  Given what is at stake here, it would be a surprise if he doesn’t file a lawsuit contesting his expulsion. Not only do we need to consider the possibility that he files such a suit, but we also need to look at the options under which he has to file a suit, and the viability of those possibilities.

1) Can Silver really make a lifetime ban and the $2.5 million fine stick?

In a word, yes.  Due to the NBA’s constitution and bylaws to which all owners must agree, Silver has broad authority suspend and fine an owner for “conduct detrimental to the NBA”.  Once Sterling admitted it was his voice on the recording we all heard, his goose was cooked for all intents and purposes.  Silver has all the authority he needs to punish Sterling based on the recording’s impact on the league, which was obvious.

Even if Sterling were to challenge Silver’s action in court, he has a major obstacle.  The “magic words” here are “arbitrary and capricious.”  Stripping the legalese away, this essentially means that in order for a court to overturn Silver’s decision, Sterling would need to prove in court that the NBA and Silver failed to follow its own rules as far as how they investigated Sterling and punished him.  In other words, if it was found that the NBA failed to authenticate the recording, concealed evidence,  or had not presented Sterling with the evidence against him, Sterling would have a legitimate claim to challenge the ruling.  Sterling’s admission negates those possibilites, which means he really has no legitimate way to appeal Silver’s ruling.

2) Does the legality of the recording make a difference?

Yes and no. No, it has no effect on Silver’s decision, and if it were found that the recording were obtained illegally, it would make no difference, if for no other reason, this is not a criminal situation. Again, Sterling’s admission makes Silver’s ruling about as iron-clad as it gets.

While I find it funny that nobody raised that question until after Silver dropped the hammer, this does get problematic down the road. I’ll come back to this point later.

3) Can the NBA really force Sterling to sell the Clippers?

Probably, but not absolutely.

While the NBA has a procedure in place to do this, there is enough ambiguity in it that the possibility of a lawsuit against it definitely exists.  There is also the possibility that the owner’s are not united as is presumed due to the vagueness in this procedure. Three-fourths of the league’s owners can vote to terminate a franchise under certain conditions, but major questions can be raised if any of them really apply in this situation.

Where this gets tricky in is Silver’s admission that he had not polled the owners. He did state that he believes there will be sufficient support to oust Sterling; there’s is not a single owner out there who will defend Sterling’s obvious racism.  But there are four very legitimate concerns as to whether the language in the NBA Constitution and by-laws was really intended for this situation.

Neither the Clippers or Sterling have money problems:

This point really punches a hole in the authority to force a sale.  Under the NBA constitution, there’s a clause known as Article 13 which allows for forcing a sale, but it was really intended as a remedy primarily for financial problems.  While an argument can be constructed that the loss of sponsorships and the threat of player boycotts would have a financial impact, the Clippers are still quite solvent, as is Sterling.  There is also no evidence that Sterling has ever committed any financial misdealings with the NBA.

Article 13 contains no “morals” clause:

While this specific portion of the NBA constitution lists many causes over which action could be taken against an owner, none of them specifically address Sterling-style racism.  That means an argument needs to be constructed in order to have a reason for expelling Sterling under this Article. However, that also means that an attorney representing Sterling just as easily can create an opposite argument that the lack of inclusion for this behavior means that it was intentionally omitted.  In other words, if they really wanted this to be grounds for expulsion, the specific language to do so would be there.

Having said that, Article 13 does contain a general requirement of “ethical conduct in business dealings and contracts.” Now, one could make an argument that Sterling’s comments could be deemed “unethical,” but it would be difficult at best to link that to “specific business dealings or practices.”  Even if one were to make a case the “specific business dealings or practices”  standard applies here because sponsors have dropped deals with the Clippers and players have gone so far as to consider boycotting games, or that Sterling’s behavior damaged relations between the league and players, there’s still a distinct lack of specificity, which is shakier ground than the NBA would like to admit because if the owners vote to expel Sterling, the “ethical conduct in business dealings and contracts” standard is likely to be their legal underpinning.

To put it simply, it’s hard to make rules against being stupid.

Despite what one might think, the Clippers’ franchise is not run in a racist way:

While we now know by his own admission that Donald Sterling is a racist of the first order, that has not been reflected in the management of the Clippers’ franchise.  There have been no reports about the current Clippers’ workplace stating that racism is hindering the efficacy of a productive workplace, and there have been no actionable allegations by players or other employees that they have experienced racism. Granted, there was a lawsuit brought against Sterling by former Clipper’s general manager Elgin Baylor which included some serious racist allegations, but that lawsuit was found to be without merit in a court of law.

Also, despite what Sterling got caught saying, there are no reports that the Clippers have engaging if ticket sales and/or marketing efforts intended to discriminate against minority fans.  As shocking as it is to say considering some of the on-court history of this franchise, at present the Clippers appear to be a well-run organization, which makes it an unusual candidate for such a move.

Lawyers love precedence, and this case has none:

Honestly, this is completely new territory; no major sports league has ever taken such an action, and that means there is no previous case upon which to draw comparisons, and more importantly, legal guidance.  When in doubt, lawyers and judges become historians looking for direction. In the absence of that, it becomes anybody guess which way this chip bounces in the Plinko game that is the American civil court.

There’s also the problem that Dallas Mavericks’ owner Mark Cuban raised. After this incident, the odds that another owner replicates what Sterling did are remote. But social mores change, and what happens when the standard for a Sterling-style expulsion reflects that change? Every owner in that room who votes for Sterling’s head has to know they are clearing the legal path for their own demise.

4) What Are Sterling’s legal options?

There’s two main ones, and both of them put the NBA in a position of having more to lose than Sterling does.

Breach of Contract:

This is the weakest of Sterling’s options, mostly because it would mean Sterling would have to prove his contract with the NBA through his franchise agreement was severed illegally.  If a court were to accept the NBA’s likely argument on the aforementioned “ethical conduct in business dealings and contracts” standard, Sterling would have almost no chance to win a breach of contract claim.  Another reason why this is the least likely route Sterling would pursue is the NBA requires owners to agree to contractual language in their franchise agreements limiting opportunities for owners to sue either the NBA and/or other owners.  Known as “waiver of recourse,” this would really hamper such a lawsuit by Sterling.

Anti-Trust:

This is the most likely shot at success for a Sterling lawsuit, because it could conceivably revolve around both California and federal anti-trust laws by contending the NBA conspired to force Sterling to sell his franchise at below-market value. Earlier, I mentioned in his press conference on Monday that Commissioner Silver made it a point to mention that he had not polled the other owners and was confident he had their support in any move to oust Sterling.  In court, Sterling could argue that fact in concert with reports the NBA may be interested in Magic Johnson buying the Clippers constitutes evidence the league is trying to force a sale to a specific buyer.  He would then argue that would violate anti-trust laws by eliminating open bidding for the team.  He could also conceivably argue that Silver’s discussion with other owners constitutes collusion.

This is the biggest place where the legality of the aforementioned recording comes into play. It would make a convenient argument that Magic John played a role in both the subject of the recording and the sale of the team.  It’s a loose connection, but remember the standard of proof in civil court is much lower than that of criminal court.

The other fact that make an anti-trust claim the most likely is any monetary damages awarded to the plaintiff in such a case are tripled.

5) Why does the NBA have more to lose in a lawsuit?

While the die has likely been cast for a legal challenge, the simple fact remains that the NBA fired the only bullet it has; they kicked Sterling off the island. Being an attorney himself, Commissioner Silver did it in a way to limit the league’s exposure to a lawsuit.  Levying a fine of $2.5 million against a man worth close to $2 billion is the equivalent of trying to fill the Grand Canyon with a bag full of beer cans, but it was the highest amount permitted by the league’s constitution and by-laws.  Had Silver issued a higher fine, he would have provided Sterling with an opportunity to argue such a penalty is “arbitrary and capricious” because it would fallen outside the constitution and by-laws.

Silver knows his actions are likely to provoke the filing of a lawsuit.  The banishment of Sterling to a de facto NBA exile is almost iron-clad; like it or not, Sterling is forbidden from any contact with players, coaches, and staff.  He is barred from attending games or practices, and he is forbidden to participate in all league activities. Short of a court injunction, Sterling’s days of interaction with the NBA are over.

Having said that, there are three reasons why a lawsuit gives Silver and the NBA cause for concern. They are aware that the minute a vote is conducted which gives Sterling the boot, they can expect the notice of a lawsuit immediately afterward.

A Sterling victory would erase a culturally-defining moment:

Don’t think for a minute that Commissioner Silver doesn’t know what a huge moment this is. Through his decisive action, he knows he has put himself in a position to be on the Mt. Rushmore more of social justice in sports; his name potentially mentioned in the same breath as Curt Flood and Jackie Robinson. Any victory…even the appearance of victory on the part of Sterling not only completely erases a historic moment, it would detract from the crucial social message sent by this banishment.

A Sterling lawsuit on a practical level erases any banishment:

Realistically, the ban of Sterling has as much to do with separating his name from the NBA brand as it does with punishing his actions.  Honestly, I believe that if it weren’t for the imminent threat of player walk-outs, the sanctions handed down from the Commissioner wouldn’t have been this severe, because I think the original plan was to find a large enough punishment that wouldn’t expose anybody to further legal action. I think Silver’s original intention was to get this over with as quickly and as quietly as possible. Once that option was no longer possible, the very same court of public opinion that demanded the drastic action also ensured there would be action in the real courts as well.

Like I’ve said, the ban is intended to separate Sterling’s name from the Clippers and the NBA.  As  I’ve also said, Sterling really can’t do anything about that.  However, as odd as it seems, the banishment from league activities and the dissolution of his ownership are two distinctly different prospects.  Legally, he could remain an NBA version of an “absentee landlord;” a guy who collects the rent checks but never shows up on the property.

That would be the worst-case scenario for the NBA, and any lawsuit ensures that will happen for at least the life of any lawsuit.  Even if Sterling has no viable case against his banishment, he can completely undercut its intent by filing a high-profile lawsuit.  By doing so, he ensures that his name stays married to that of the Los Angeles Clippers and the NBA because the lawsuit will keep his name in the news, and any mention of such a legal action will almost require the mention of the Clippers and the NBA.  This could easily go on for far longer than the NBA would like, if for no other reason than anti-trust suits can easily take  years to resolve.

“Pre-Trial Discovery”

When it comes to this case, “pre-trial discovery ” is simply legalese for “airing everybody’s dirty laundry.”  What this means is once Donald Sterling is in court defending himself on charges related to racism, he is going to say he isn’t the only NBA owner who is a racist or is generally a bad person.  Any owner in the NBA who has ever done anything even close to the “ethical conduct in business dealings and contracts” standards is going to get their name dragged through the mud.

Specific to the racism charge, Sterling’s legal strategy could easily be to demand that any evidence showing other owners and officials are also racist be shared.  Sterling could force the NBA to produce emails and other records from owners and officials that might depict them in a negative manner.  If he can bring such evidence to light, he can then argue the punishment levied against him was unwarranted and hypocritical as evidenced by the conduct of those who voted him out.

The scary part of this for the NBA is that Sterling has owned the Clippers for 33 years. That’s an awfully long time, and that means there are just far too many opportunities for interaction with league officials and owners …including private conversations just like the one that landed Sterling in this situation.

The best way to “bottom line” this is to ask yourself two questions:

• If there are other racists in the NBA, doesn’t it make sense Donald Sterling would know who they are?
• Can you imagine what will happen if Sterling produces a media friendly piece of evidence painting an NBA owner or league official in the same racist light as he has been?

This is exactly the slippery slope Mark Cuban alluded to when he was asked for comment on this matter…in fact, the media is already starting their very own “witch hunt.”

 6) What about Mrs. Sterling?

Sterling’s marital status could toss a monkey wrench into this process as well. Shelly and Donald Sterling are estranged but not divorced. Since California is a “community law” state, if Sterling’s wife filed for a divorce before the ownership of the Clippers is settled, she would entitled to half of his assets, which obviously includes the team.

This could easily turn into a legal quagmire for the NBA.  Shelley could easily become a “wild-card;” she could use the divorce as a tactic to stall the NBA’s action against her husband, or she could use the divorce to extort any new owner who wanted to buy her half of the team.

Even without a divorce, Sterling could try to transfer the team to his wife, although that move has little chance of success other than a stalling tactic because the NBA must approve such a move.  Shelly Sterling would be subject to the requirements the league established after Donald Sterling became an owner which are used to evaluate prospective owners.  The NBA would never approve such a move for three reasons:

• It would be seen as an obvious attempt to evade the discipline of the league.
• Shelley Sterling is rumored to have some pretty ugly skeletons in her closet as well, and the NBA really can’t afford to take another trip down that road.
• The NBA knows that any outcome of this situation which involves a Clippers franchise owned in any way, shape, form, or degree will be catastrophic if not fatal to the league.

That last reason is why the “divorce” should scare the hell out of the NBA.  With the filing for a divorce, Shelley Sterling becomes a 50% owner of the Los Angeles Clippers. The NBA would have precious little means to stop that, which would leave them with an owner they can’t afford to have, and with no real way to get rid of her other than to buy her out at what you can guarantee will be an overly-inflated price.

Oh, if you doubt the “fatal” description, consider that Charles Barkley said on the “Dan Patrick Show” today that “no black players will play in the NBA if Sterling still owns the team.”  Then, consider Larry Johnson’s idea about an “all-black” basketball league. Let those two things sink in for a moment…

7) What would be Sterling’s reason to sue the NBA?

Feel free to create your own “revenge”  scenario, but there’s one huge reason which cannot be ignored: money.

Specifically, any fight to stop the sale of the Los Angeles Clippers will be all about Sterling wanting to avoid paying capital gains taxes.  To explain it simply, you pay taxes on an asset from which you profit from it’s sale. Donald Sterling bought the Clippers in 1981 for $12.5 million, and current estimates place the value of the franchise somewhere between $600 million and $1 billion.  Capital gains taxes are paid to both the federal and state governments, which add up to about 33% of the profit from the sale.  In Sterling’s case, if he sold the team for $1 billion, he would be liable for 33% tax on a profit of $987.5 million, which means Sterling would owe $329 million in tazes.

Now, let’s say he can stop and/or delay the sale of the team.  The real goal for Sterling here would be to retain ownership of the team until the time of his death. His family would inherit the team, and to keep the math easy, let’s say the value of the team is the same $1 billion used for the sale example. The value of the team at the time of inheritance is key, because if the family inherited the Clippers and then sold it, they would only pay a capital gain tax on the difference between the value of the team when they inherited it and the value of it when sold.  For example, if the team is valued at $1 billion when it was inherited, then sold later for $1.2 billion, the inheritors would only pay capital gain taxes on a profit of $200 million, which would mean they would be liable for only $66 million dollars.

Let’s say Sterling dies in the middle of this process, and the Sterling family sells the team immediately upon inheritance. In that case they would pay no capital gains tax; they would only be liable for estate/inheritance taxes, which are far less confiscatory than those on capital gains. There could also be an arrangement made at the time of sale to under which the employees of the Clippers could own a percentage of the team, in which case any capital gain tax liability could be partially or fully avoided.

The Bottom Line:

Death and taxes are the two certainties of life, and they are also two of the driving forces in this story.  By whatever measure necessary, Donald Sterling needs to be out of the NBA by the time the next season begins. While I don’t think Charles Barkley’s assessment is entirely accurate, I do believe that an NBA which still includes any member of the Sterling family will suffer a financial and social cataclysm unseen to this point in the history of professional sports.

Commissioner Adam Silver has already fired the one bullet he has, and now it has yet to be seen if Sterling will fire his. I would be surprised if he doesn’t; there’s simply too much money at stake. The worst part is that a legal battle could be all about simply delaying the inevitable. Think about it…Sterling is in his 80’s, and the word is out today that he has prostate cancer.  If Sterling does take this matter to court, it is entirely possible he only intends to drag this matter out in court, which could easily take years, which could mean a string of delaying tactics intended only for Sterling to retain ownership of the Clippers until his death.