The opinion of the court was delivered by: CARTER
In or about April, 1983, the National Basketball Association ("NBA") and the National Basketball Players Association ("NBPA") jointly applied for an order to modify the 1976 Robertson settlement agreement approved by this court in an opinion, Robertson v. National Basketball Association, 72 F.R.D. 64 (S.D.N.Y. 1976) (Carter, J.), aff'd, 556 F.2d 682 (2d Cir. 1977), with which familiarity is assumed. In an affidavit in support of that application, David Stern, then Executive Vice President for Business and Legal Affairs of the NBA, pointed out that escalating expenses had caused NBA teams to suffer serious financial losses. He cited players' salaries and benefits as the chief factors in increasing the financial burden of operating an NBA franchise. Stern stated that financially weak teams were at a competitive disadvantage since they could not offer talented players salaries commensurate with what they could obtain from teams with greater financial resources. The purpose of the Modification Agreement was, in David Stern's words, "to insure the financial stability of troubled NBA teams, improve competitive balance and at the same time preserve and improve the basic framework of the [Robertson ] Settlement Agreement." Aff. of David Stern at 3, Ex. 1, Aff. of Gary Bettman.
Lawrence Fleisher, General Counsel for the NBPA, disagreed that increased players' salaries and benefits were the sole, or even the principal, causes of whatever financial setbacks NBA teams might have suffered. However, according to Mr. Fleisher, the players "did recognize that it was in [their] overall best interest to have a financially stable league with as many viable franchises as possible bidding for the services of NBA players." Aff. of Lawrence Fleisher at 4, Ex. 2, Aff. of Bettman. The essential objectives of the players in negotiating the terms of the Modification Agreement were: (i) "to maintain a system of free agency, which, to the greatest extent possible, would insure that player salaries be established at competitive levels as a result of a free and open bidding system; (ii) to strengthen the long-term financial stability of the league and to protect the jobs of as many players as possible; and (iii) to provide for some form of overall revenue sharing between the players and the NBA teams ...." Id. at 4-5.
Both sides believed that the agreed modifications met their basic objectives. The features of the agreement relevant here are the imposition of a salary cap on NBA teams and the guarantee that the players would receive salaries and benefits equal to 53 percent of the NBA teams' overall gross revenues.
This unique agreement was approved by the court on June 13, 1983, and will remain in effect through the playoffs at the close of the 1986-87 basketball season. In urging the court to sign the order, James Quinn, counsel for the Robertson class, stated "we believe that the agreement will insure league wide stability in regard to its financial impact on the league and the clubs" (Tr. 6-7, June 13, 1983 proceeding). Jeffrey Mishkin, counsel for the NBA, urged court approval in these words: "we recognize, and the players recognize that the maximum team salary necessarily imposes a restriction on the ability of the NBA teams to negotiate and sign player contracts, and the maximum team salary is designed and was intended to impose that kind of a restriction." (Id. at 8-9).
The initial representations by Stern and Fleisher clarified the critical issues, and the statements of counsel at the June 13, 1983 hearing indicated that they had been the subject of hard fought, arms-length negotiations. Each party emerged convinced that the resulting agreement fully and adequately protected its fundamental interests, the sine qua non for its being a signator to the agreement.
To insure that these hard-won objectives would not be undermined, the Modification Agreement contains an enforcement provision, Article 111 C (9): "Neither the parties hereto, nor any Team or player shall enter into any agreement, Player Contract, Offer Sheet or other transaction which includes any terms that are designated to serve the purpose of defeating or circumventing the intention of the parties as reflected by (a) the provisions of this Modification Agreement with respect to Deferred Gross Revenues, Maximum Team Salary and Minimum Team Salary and (b) those terms and provisions of the Settlement Agreement which remain in full force and effect as provided in Article II, paragraph B above." Pursuant to Article IV A (2), all disputes arising under this paragraph were to be referred to the Special Master.
Against that background, I approach the issue at hand recognizing that when this agreement was negotiated, signed and approved in 1983, both parties sought to put in place iron-clad team salary restrictions and procedures for revenue sharing between the players and franchise owners. The Special Master was given the vital role of preserving the integrity of their agreement by preventing erosion of the basic interests which each party had sought through the modification.
The facts that give rise to the instant controversy are not in dispute. When the New York Knickerbockers ("Knicks"), were over the maximum team salary limitation imposed by Article III of the Modification Agreement, they made an offer to Albert King, a player with the New Jersey Nets. The salary cap barred the Knicks from offering a salary to any new player unless one of the salary cap exceptions provided in Article III C(2) (a)-(g) of the Modification Agreement was applicable.
Only two of these exceptions are pertinent to this case. Under Article III, C (2)(c)(i) a team at or over the maximum team salary may replace "a player who retires" at a salary no greater than 50 percent of the salary "last paid to the player being replaced." Under Article III C(2)(e) a team at or over the maximum team salary may replace a Veteran Free Agent with a new player at "a salary no greater than 100 percent of the salary last paid the Veteran Free Agent."
Leonard Robinson, an 11 year NBA veteran, who had been playing with the Knicks for three years at the close of the 1984-85 season, did not seek to renew his contract for the 1985-86 season. His annual salary for the 1984-85 season had been $540,000. The question for the Knicks, therefore, was whether the offer sheet could be presented pursuant to Article III, C(2)(c)(i) at half Robinson's salary or $270,000 per year, or under Article III, C(2)(e) at 100 percent of Robinson's salary or $540,000 per year.
The Knicks took the view that Robinson was a Veteran Free Agent, enabling them to offer Albert King 100 percent of Robinson's last salary. On that assumption, the initial offer sheet to King contained a signing bonus of $400,000 and five years of guaranteed salary as follows: 1985-86 - $450,000; 1986-87 - $450,000; 1987-88 - $600,000; 1988-89 - $700,000; 1989-90 - $700,000.
Under Article III C(7) a signing bonus is allocated, pro rata, over the number of "guaranteed" salary seasons covered by the contract. Thus, the $400,000 bonus to King was to be allocated at the rate of $80,000 per year for the five years guaranteed. The proposal enabled the Knicks to offer King $530,000 for each of the first two years of the contract, keeping the offer under the $540,000 salary last paid to Robinson. Since the termination date of the agreement was the 1986-87 basketball season, the offer sheet was within the salary cap during the life of the agreement.
The NBA, however, took the position that the Knicks could offer King only 50 percent of Robinson's last salary since in its view Robinson was a retiree, not a Veteran Free Agent. The NBPA took the Knicks' side. Article III C (2) (e) (ii) and Article IV A (3) provide that when the NBA and the NBPA disagree as to which salary cap exception applies in a particular case ...