Appeal from an order of the United States District Court for the Southern District of New York, Robert L. Carter, Judge, dismissing the complaint in this antitrust action. Appellant O. Leon Wood, a professional basketball player, challenges on antitrust grounds the legality of the so-called "salary cap,": college draft, and prohibition of players corporations provisions of a collective bargaining agreement between the defendants, the national Basketball Association, its member-teams, and the National Basketball Players Association. Affirmed.
Before: WINTER and PRATT, Circuit Judges, and MALETZ, Judge.*fn*
O. Leon Wood, an accomplished point-guard from California State university at Fullerton and a member of the gold medal-winning 1984 United States Olympic basketball team, appeals from Judge Carter's dismissal of his antitrust action challenging certain provisions of a collective bargaining agreement between the National Basketball, Association ("NBA"), its member-terms, and the national Basketball Players Association ("NBPA"). Wood contends that the "salary cap," college draft, and prohibition of player corporations violate Section 1 of the Sherman Act, 15 U.S.C. § 1 (1982), and are not exempt from the Sherman Act by reasons and the non-statutory "labor exemption." We disagree and affirm.
The challenged provisions are in part the result of the settlement of an earlier antitrust action brought by players against the NBA. Robertson v. National Basketball Ass'n 72 F.R.D. 64 (S.D.N.Y. 1976), aff'd 556 F.2d 682 (2d Cir. 1977). In that case, a class consisting of all NBA players challenged both the merger of the NBA with the now-defunct American Basketball Association and certain NBA employment practices, including the college draft system by which teams obtain the exclusive right to negotiate with particular college players. Following extensive pre-trial proceedings, see Robertson v. National Basketball Ass'n, 413 F. Supp. 88 (S.D.N.Y. 1976); 67 F.R.D. 691 (S.D.N.Y. 1975); 389 F. Supp. 867 (S.D.N.Y. 1975), the parties settled the case on April 29, 1976. The Settlement Agreement provided for the payment of $4.3 million to the class and for substantial modification of the practices attacked by the plaintiffs.
The Settlement Agreement is effective through the 1986-87 season. It modified the college draft system by limiting to one year the period during which a team has exclusive rights to negotiate with and sign its draftees. If a draftee remains unsigned at the time of the next year's draft, he may re-enter the draft. Most important, the Settlement Agreement instituted a system of free agency allowing veteran players to sell their services to the highest bidder subject only to their current team's right of first refusal that allows it to match the best offer.
On October 10, 1980, the NBA and NBPA signed a collective bargaining agreement that incorporated the provisions of the Settlement Agreement pertinent to this action. The 1980 collective agreement expired on June 1, 1982, however, and the 1982-83 season began before a new agreement had been reached. Negotiations between the NBA and the NBPA continued and centered on the league's insistence upon controls on the growth in players' salaries. The NBA claimed that increases in players' salary resulting from free agency were in part responsible for mounting losses and that a number of its teams might face bankruptcy absent some stabilization of expenses. The NBPA, after reviewing the teams' financial data, reached an agreement in principle with the NBA on March 31, 1983, some 48 hours before a strike deadline set by the players. This agreement was memorialized in writing on April 18, 1983, in a Memorandum of Understanding (the "Memorandum").
The Memorandum continued the college draft and free agency/first refusal provisions of the earlier agreements and, like those agreements, included provisions for fringe benefits such as pensions and medical and life insurance. However, the Memorandum also established a minimum for individual salaries and a minimum and maximum for aggregate team salaries. The latter are styled the salary cap provisions, even though they establish a floor as well as a ceiling. Under the salary cap, a team that has reached its maximum allowable team salary may sign a first-round draft choice like Wood only to a one-year contract for $75,000. An integral part of the method by which the floor and ceiling on aggregate team salaries were to be determined was a guarantee that the players would receive 53 percent of the NBA's gross revenues, including new revenues, in salaries and benefits. This combination of fringe benefits, draft, free agency, a floor ad a ceiling on aggregate team salaries, and guaranteed revenue sharing was unique in professional sports negotiations.
The Memorandum also prohibited the use of "player corporations," which had been formed by players to enter into contracts with teams. According to the NBPA's general counsel, the players agreed to this prohibition in light of changes in the tax laws that "virtually eliminated" the tax advantages of incorporation. The teams sought the prohibition to eliminate administrative an accounting difficulties and potential withholding tax liability that arose from their entering into contracts with player corporations.
Because the Memorandum altered certain terms and conditions of the Settlement Agreement, the NBA and NBPA jointly requested district court approval of a modification of the Settlement Agreement. Fed. R. Civ. P. 23(e). After a hearing at which class members were invited to address the fairness and adequacy of the modification, Judge Carter approved it on June 13, 1983.
Against this background, the Philadelphia 76ers drafted Wood in the first round of the 1984 college draft. At the time of the draft, the 76ers' team payroll exceeded the amount permitted under the salary cap. The 76ers therefore tendered to Wood a one-year $75,000 contract, the amount stipulated under the salary cap. This offer was a formality, however, necessary to preserve its exclusive rights to sign him. In fact, the team informed Wood's agent of its intention to adjust its roster so as to enable it to negotiate a long-term contract with Wood for substantially more money. Wood understandably did not sign the proffered contract.
On September 13, 1984, he turned from the basketball court to the district court and sought a preliminary injunction restraining enforcement of the agreement between the NBA and NBPA and compelling teams other than the 76ers to cease their refusal to deal with him except on the terms set out in the collective bargaining agreement and memorandum.
Judge Carter denied Wood's motion. Wood v. National Basketball Ass'n, 602 F. Supp. 525 (S.D.N.Y. 1984). He found that both the salary cap and college draft provisions
affect only the parties to the collective bargaining agreement -- the NBA and the players -- involve mandatory subjects of bargaining a defined by federal labor laws, and are the result of bona fide arms-length negotiations. Both are proper subjects of concern by the Players Association. As such these provisions come under the protective ...