A Breakdown of the NBA’s Rules Regarding Cap Circumvention

The NBA’s Collective Bargaining Agreement contains an article – Article XIII – in which it 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 behaves 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.

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).

The NBA’s salary cap machinations are so complex, and so important, that 97 pages of the CBA are dedicated to its every machination. It follows logically that another 10 pages are dedicated to those who try to operate outside the lines of those 97 – and the content of those 10 pages that make up Article XIII are simplified below.

 

Section 1: General Prohibitions

Section 1 of Article XIII is entitled General Prohibitions, and Section 1(a) establishes the general principle that no team or affiliate is to engage in circumventory behavior. Section 1(b) is the one that begins to establish what that behavior would consist of.

Specifically, 1(b) states that any agreement between a team and a non-team entity that agrees to pay any player of that team for their basketball services – even if it is dressed up as non-basketball services – counts as a circumvention violation. And the CBA also gives the NBA the power to infer this form of agreement, based on the size on either or both of the player’s playing contract and/or their third party agreement.

(b) It shall constitute a violation of Section 1(a) above for a Team (or Team Affiliate) to enter into an agreement or understanding with any sponsor or business partner or third party under which such sponsor, business partner, or third party pays or agrees to pay compensation for basketball services (even if such compensation is ostensibly designated as being for non-basketball services) to a player under Contract to the Team. Such an agreement with a sponsor or business partner or third party may be inferred where: (i) such compensation from the sponsor or business partner or third party is substantially in excess of the fair market value of any services to be rendered by the player for such sponsor or business partner or third party; and (ii) the Compensation in the Player Contract between the player and the Team is substantially below the fair market value of such Contract.

Basically, Section 1(b) establishes the general principle that if a team is underpaying a player, and knowingly engages with another party to massively overpay them for something else outside of their official NBA contract as a form of topping up their overall take-home pay, they can be deemed to be engaging in salary cap circumvention.

Section 1(c) further expressly precludes a team from paying a player not currently a member of their roster:

(c) It shall constitute a violation of Section 1(a) above for a Team (or Team Affiliate) to have a financial arrangement with or offer a financial inducement to any player (not including retired players) not signed to a current Player Contract, except as permitted by this Agreement.

 

Section 2: No Unauthorized Agreements

Section 2 is entitled No Unauthorized Agreements, and builds on the general prohibition outlined in Section 1. It gets into the specifics of what conduct is disallowed. Section 2(a) expressly prohibits:

• In subsection (i), any form of agreement or promise, express or implied, about future player contracts (that is to say, any form of “sign cheap now and we’ll take care of you in your next deal” type of deals; bear this in mind, as this will also crop up later on).

• In subsection (ii), any extra or hidden compensation not in the Uniform Player Contract.

• In subsection (iii), any hidden investment or business opportunities linked to a team.

 

Section 2(b) makes it a violation not only for a team to actually make an unauthorized deal of such nature, but also for either the team or player to try to make one, or intentionally ask for one. That is to say, even if one party rejects the circumventory overtures of the other, the violation has nevertheless occurred.

Section 2(c) deals with the complicated subject of passive investments. This section acknowledges that in real life, wealthy people (both players and team owners) often cross paths in business, but it draws limits to prevent disguised compensation. Specifically, while teams and a player can both invest in the same business, it is only permissible if:

• Each owns 12.5% or less of the business.
• Their investments are independent (i.e. not coordinated or discussed)
• The business opportunity did not come from one to the other (i.e., the team affiliate did not give the player the deal).

 

Section 2(d) states that violations can be proven by direct evidence (emails, contracts, testimony) or circumstantial evidence (facts that strongly suggest wrongdoing). For example, if a player’s salary is way below market value, but he suddenly gets a “business deal” with a team owner worth millions, that pattern can be deemed enough to prove a violation, even without express confession.

(There is also an extra section dealing with the potentiality of teams paying retired players down the road for playing services conducted within the previous five years. An additional section limits the amount of charitable contributions that a team can make to $20,000 per player per season, up to a team-wide maximum of $75,000 per season, to close the loophole of large charitable donations as a means of bolstering take-home pay.)

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Essentially, then, the circumvention rules are as follows:

• 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.

 

Section 3: Punishments

If cap circumvention is found, by inference or express conduct, the question then becomes – what powers do the NBA have to penalize those involved?

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

• For a first offense – a fine of up to $4.5 million
• For a second offense – a fine of up to $5.5 million
• The forfeiture of a first-round pick [note the use of the singular]
• The voiding of the relevant player contract
• The voiding of any other pertinent agreement relating to the conduct

 

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

• A fine of up to $7.5 million
• The forfeiture of “draft picks” [note the absence of the singular – and also the absence of the words “first-round”]
• The voiding of the relevant player contract
• A fine for the player of up to $350,000
• The prohibition of any new or future contract between player and team
• The suspension for up to one year of any team personnel found to have engaged in the circumvention
• Unless the player is able to prove to the arbitrator that they were unaware of the cap circumvention, the league can direct them to “disgorge” whatever benefits they received from the third-party agreement (i.e. be forced to give up the benefits and/or money received by the cap circumvention).

The commissioner also reserves the right to levy an additional fine of up to $1 million on any team personnel found to have committed the Section 2 violation. Distinct from the above, this $1 million fine can be imposed unilaterally, i.e. without requiring findings of liability by an arbiter.

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).

It would be harder to fathom, perhaps, had it not already once happened.

 

Precedent

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.

Apropos of nothing, of course.

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