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Wednesday, July 23, 2014

Donald Sterling’s Lawsuit: An Explainer

This past Friday, Donald Sterling filed suit against the NBA, challenging the league’s plan to force a sale of the Clippers. Sterling’s claims include:

  1. Violations for denial of Constitutional rights;
  2. Breach of contract;
  3. Antitrust violations;
  4. Conversion;
  5. Breach of fiduciary duty.

I’ll do my best to walk through each of Sterling’s claims and explain why I don’t think they will succeed. Before I do, I should address two significant points that the NBA will probably emphasize at every opportunity. These two points could defeat each of Sterling’s five claims before his lawyers could argue them on their merits. First, Sterling, and all owners, by virtue of being party to the NBA’s Constitution and Bylaws, have agreed pursuant to Article 14(j) that “[t]he decisions of the Association…shall be final, binding, and conclusive, and each Member and Owner waives any and all recourse to any court of law…”. Basically, Sterling agreed to never sue the NBA for disputes that should be governed under its Constitution and Bylaws.

Second, Shelly Sterling has, as a result of her husband’s recent alzheimer’s diagnosis, assumed control of the Sterling Family Trust and has sold the franchise. The NBA has indicated that it will argue that this sale is an intervening cause of the harm Donald Sterling’s complains about, and it is therefore not liable to him for those harms. In other words, there was no “forced sale”. As NBA general counsel Rick Buchanan put it:

Among other infirmities, there was no `forced sale’ of his team by the NBA – which means his antitrust and conversion claims are completely invalid. Since it was his wife Shelly Sterling, and not the NBA, that has entered into an agreement to sell the Clippers, Mr. Sterling is complaining about a set of facts that doesn’t even exist.

An altogether separate issue is the fact that in selling the Clippers, Ms. Sterling agreed to indemnify the NBA from any lawsuit related to the sale. That means that if Donald Sterling succeeds against the NBA, Shelly Sterling and the Sterling Family Trust will pay the NBA’s damages. Donald Sterling would make no money in any successful lawsuit against the NBA. Obviously Mr. Sterling does not see it this way, but his only way out from the corner Ms. Sterling has placed him in and recover damages from the NBA would be to successfully claim, probably in a separate lawsuit, that Ms. Sterling never had a legal right to act on behalf of the Trust.

Violation of rights under California Constitution

Usually complaints and briefs lead with what their authors perceive to be their strongest claim. Sterling’s lawyers clearly believe that a “right to privacy” is ensconced in California’s Constitution and that this right precludes “evidence obtained as a result of…recording a confidential communication” from being used in “any judicial, administrative, legislative or other proceeding.”

Two issues with Sterling’s reasoning here flow directly from his acquiescence to be bound by the NBA’s Constitution and Bylaws. First, Article 18(e) of the Constitution and Bylaws empower the NBA’s board of directors to take binding action in accordance with the laws of the State of New York, not California. Arguably therefore, California’s Constitution would not govern the dispute and Sterling would not be able to avail himself of its protections. Moreover, even if a New York court would apply California law in these circumstances, the NBA could argue that Sterling, independent of the recording, admitted making racist comments, and also that his separate racist comments made during an interview with Anderson Cooper were not subject to California’s right to privacy.

Second, litigants routinely waive various Constitutional protections for a variety of reasons, such as the right to a speedy trial or the right against self-incrimination. As pertains to Sterling, his agreement to be bound by the NBA’s Constitution and Bylaws could amount to a waiver of otherwise applicable statutory protections, such as California’s right to privacy and the corollary evidentiary rule barring surreptitious recordings. This is important because Article 14(e) states that in termination proceedings, “[s]trict rules of evidence shall not apply, and all relevant and material evidence submitted prior to and at the hearing may be received and considered.”

Breach of Contract

Next, Sterling’s lawyers parse Commissioner Adam Silver’s specific actions taken under the authority of the NBA’s Constitution and Bylaws to claim that he did not have a contractual right to take those actions.

Without getting into the nitty-gritty minutia of the proper interpretation of the various clauses in the NBA’s Constitution and Bylaws, it is important to realize that Article 14(e), to which Sterling agreed to subject himself, treats the Board of Governors’ actions as “final, binding and conclusive, as an award in arbitration”. Courts are loathe to overturn arbitration awards because there is a very strong public policy favoring private resolution of disputes over tying up judicial resources. That means that even if Sterling has a more reasonable argument than Silver, as long as Silver’s argument is also reasonable, Sterling’s chances in the courts are extremely limited. Courts overturn arbitration awards only under rare circumstances. For more on this see Nate Duncan’s recent piece.

Violation of the Antitrust Laws Under Sherman Act § 1

The Sherman Act is a Federal statute barring conspiracies in restraint of trade. Sterling claims that “Sterling and the competing NBA owners’ collective decision to force a sale of the Los Angeles Clippers” amounted to an anticompetitive restraint of trade that did not reflect the Clippers’ value in an unfettered market.

Sterling claims that a forced sale “would create damages of at least $1 billion, which includes capital gains taxes, unnecessary and increased investment-banking fees, legal and transactional costs, and the loss of all future appreciation in the Los Angeles Clippers franchise value, before trebling.” (Trebling means that if Sterling succeeds, a court can punish the NBA for violating the antitrust laws by tripling Sterling’s damages to $3 billion.)

The problem with the antitrust claim is that to be successful under § 1, a plaintiff has to define the market, and also prove how competition in that market was hindered by some collective action. While I believe that Sterling has correctly identified the market as “ownership interest in NBA teams[,]” I do not believe that he can prove that the Silver and the NBA’s other owners harmed that market. Specifically, Steve Ballmer has proposed to purchase the Clippers for $2 billion. Not only did Ballmer’s bid culminate a frenzy of competing offers in a free market reflecting “supply and demand“; it is reported to be at least 20% higher than the next closest offer20% higher than would have been attained had a sale not been forced; orders of magnitude greater than previous recent valuations by Forbes and Sterling himself; and by far a record valuation for an NBA team.

While it is true that Sterling will have to pay capital gains taxes on the forced sale, the antitrust laws would not serve as a basis to award damages based on the tax consequences of a proper transaction in a competitive market. It would also be difficult and speculative to prove damages based on monetary appreciation of the Clippers since that Mr. Sterling will forgo, since will be free to invest the money he receives in any number of alternate assets that would also appreciate.

Conversion

Conversion is a common-law tort in which a defendant deprives the plaintiff of the use and enjoyment of his or her property. For reasons already touched upon, it is hard to see Sterling succeed. Specifically, the NBA could argue that its conduct is governed by contract; that it reasonably followed its own procedures for terminating Sterling, subject to review as in arbitration; that Sterling promised not to sue the NBA; and that an intervening cause led to the harm of which Sterling complains.

Breach of Fiduciary Duties

Sterling’s breach of fiduciary duty allegation entails an accusation that Silver and the other NBA owners occupy a special relationship of trust to Sterling, requiring them to avoid self-dealing and act only in his best interests. Successful actions alleging a of breach of fiduciary duty usually involve proof that the defendant acted in a deceitful manner, to his or her own advantage, at the expense of more vulnerable party.

The problem here, in addition to, again, the intervening cause and the covenant not to sue, is that the relationship of the parties and their respective rights and obligations are defined in a pretty fulsome manner by the NBA’s Constitution and Bylaws, which set the parties expectations vis a vis each other.

Conclusion

While Sterling’s gambit was not altogether unexpected, I would expect the NBA to aggressively counter it and to succeed rather quickly in court, probably before any serious expense or burden (depositions, etc.) even take place.

But why is Sterling even bothering on this quixotic voyage? First, from all appearances, Sterling filed this lawsuit before it became widely known that Ms. Sterling agreed to indemnify the league. That makes a big difference: if Sterling thought that even if he won he would be robbing Peter to pay Paul, he might not have filed his suit. Second, Sterling may press this suit and concurrently challenge the Alzheimer’s diagnosis, Ms. Sterling’s assumption of control over the trust, and consequently the indemnification clause as well.

If Sterling runs into a brick wall at every turn, and slinks away into the night with a $2 billion reward, at least the NBA and its fans will finally be rid of one of the worst owners in sports history. Next, maybe Knicks fans can turn the mountain of evidence demonstrating James Dolan’s mental incapacity and rid the league of the next guy on the (literal) shit list.

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