Lockout looms over 2010-11 season

The NBA has had its share of good news lately. We saw a dream matchup in the Finals between the Lakers and Celtics, with 28.2 million people in the U.S. alone tuning in for the deciding Game 7. The salary cap unexpectedly rose in early July -- a result of the highest revenues in league history. Then, came the mother of all free-agent markets, with no fewer than 11 recent All-Stars testing the waters and led by none other than the reigning two-time MVP. A new powerhouse was built in Miami, and across the league teams committed over $2.08 billion in multi-year contracts to more than 70 players.

Yet amidst the optimism, a dark cloud hangs over what otherwise promises to be an epic 2010-11 campaign. The NBA's collective bargaining agreement (CBA) will expire on June 30, 2011. If the league and players' union don't come to terms on a new agreement by then, the league will impose a lockout, a work stoppage that will disrupt business and could possibly lead to the cancellation of the entire 2011-12 season.

Difference of opinion

Labor pains have been a part of the NBA almost as long as the league has been in existence. Bob Cousy first organized the players in 1954, and the league formally recognized the union in 1957. A near strike at the 1964 All-Star Game forced the adoption of a pension plan. The first CBA was ratified in 1970, and in 1983 the sides agreed to share league revenues and institute the modern salary cap. The players filed antitrust lawsuits in 1970 and 1987, and nearly decertified the union (a tactic that will be discussed below) in 1995.

Despite this turmoil, the NBA hadn't lost a game to labor issues until 1998. That changed when the league invoked its option to terminate the 1995 CBA at the conclusion of the 1997-98 season. Without a new agreement in place on July 1, 1998, the league halted operations and locked out its players. The sides came to terms on a new agreement just before their drop-dead date to cancel the season entirely, barely salvaging an abbreviated 50-game campaign. The 1999 agreement remained in effect until 2005, when the two sides quickly came to terms on the CBA that is currently in force.

Stern I grew up in Stern's Delicatessen. He has his meat wrong. This is substance.

-- NBA commissioner David Stern responding to Bill Hunter's claim that his take on player salaries is "baloney."

The owners declined to invoke an option to extend the current CBA to 2012, deciding instead to let it expire in 2011. Their primary motivation is financial. The players are guaranteed 57 percent of the league's revenues -- and that's gross revenues, before expenses come out. This has led to what commissioner David Stern cited as a loss of at least $200 million per year in the first four years of the agreement and $370 million in 2009-10. According to Forbes' 2009 report on NBA team valuations, 12 of the 30 teams lost money in 2008-09, which led the league to take out a $175 million credit line in 2009 to help bail out financially strapped clubs. Stern places the blame squarely on player salaries.

"[They're] too high," he said in February. "I can run from that, but I can't hide from that, and I don't think the players can either. Those are the facts, and that's what we are dealing with. We are fact based."

Players Association executive director Billy Hunter disputes these facts, going so far as to label Stern's claims "baloney." According to Hunter, much of the reported losses came from depreciation and interest on debt, which should not factor into the league's balance sheet. "There might not be any losses at all. It depends on what accounting procedure is used," Hunter said. "If you decide you don't count interest and depreciation, you already lop off $250 million of the $370 million."

Hunter's point is that costs associated with the purchase and sale of teams are separate and distinct from those associated with the operation of those teams. Just as the players aren't entitled to a share of the profits when teams are sold, they shouldn't be encumbered by the costs related to team purchases.

Responding to Hunter's "baloney" comment, Stern stuck to his guns. "I grew up in Stern's Delicatessen," he said in June. "He has his meat wrong. This is substance."

So we have an impasse, with the two sides disagreeing on how to interpret the same information.

'There's a gulf, not a gap'

The sides got an unprecedented early start to negotiations, meeting in August 2009 to share numbers and outline goals. The league delivered a proposal in January that was received coldly by the players. The proposal reportedly contained a drastic reduction in the players' revenue split, and elements of a "hard," or fixed, salary cap. According to Stern, it merely reflected economic realities. "We had assured the players that we would deliver a proposal that would lead to that sustainable business model and based upon the undisputed facts, and we delivered that," he said.

Instituting a hard cap would represent a radical shift in the way the league has conducted its business for nearly 30 years. The NBA currently uses a "soft" cap, which means there is a limit on spending but teams are allowed to exceed it under specific circumstances defined by "exceptions." One of those exceptions is "Bird" rights, the ability to exceed the cap when re-signing their own players. "That followed our belief that it was a good thing to have the continuity that a player being identified with the home team for his career gave you," Stern said. Implementing a hard cap would mean eliminating most or all of these now-familiar exceptions.

It comes down to cost control. Every exception on the books has a cost that can be measured in dollars. By eliminating or limiting exceptions, the league would be reining in costs. Lakers guard and union president Derek Fisher said the elimination of exceptions like Bird rights would be stifling for both players and teams. "The elimination of exceptions would really mean more restricted [player] movement," he said. "That's one thing we're working really hard to combat. A lot of players are in situations that aren't good for them and aren't good for their teams. Our exceptions, our Bird rights, allow our players to make those decisions, and give the teams more flexibility to make changes they need to make."

Another item at the top of the owners' agenda is changing the way revenue is split between owners and players. "Part of the problem with the existing system is it's based largely on revenue, not net revenue," NBA deputy commissioner Adam Silver said. Under the current system, teams pay for all expenses out of their share of the pie. But it takes money to make money, and revenue increases (from which players reap the benefit) come as a result of increased expenses (for which the players do not bear the cost). "Our teams did a spectacular job in a down economy of increasing ticket sales," Silver said, "but that came at the cost of additional promotions, additional marketing, additional staff."

"It's taking more expense and effort to produce [revenues] than it has historically," Stern said. "We are not pleading poverty. We are stating the need for an improved revenue versus expense model that would be sustainable and continue to allow our sport to grow."

The sides met again over All-Star Weekend, this time with a number of star players, including LeBron James, Dwyane Wade and Carmelo Anthony attending in a show of solidarity. The owners' proposal was the principal topic of discussion. "The right adjectives were thrown around, and our proposal was appropriately denounced," Stern said. "Our response is you can denounce it, tear it up, you can burn it, you can jump up and down on it, as long as you understand that it reflects the financial realities of where we are."

And with that said, it was left up to the players to craft their own proposal. "We told them, as far as we are concerned, [our] proposal was one way to get to the result that we need," Stern said. "There could be a hundred ways, and we welcome their attempt to deal with the ways that we can get through." Fisher appreciated the task at hand, saying the players would deliver "as realistic and as serious a proposal as it can be, and not something we send back just for the exercise."

The players submitted their proposal in late June. It left many features of the current agreement in place, including the soft cap, exceptions and luxury tax, but it provided more aggressive revenue sharing and eliminated base-year compensation, a mechanism that makes players harder to trade under certain circumstances. The league didn't think the players fulfilled their mission. "We're asking for fundamental changes in the system, and the players, as Billy Hunter has said publicly, would very much like the present system to continue," Stern said. The sides met again in August, with Stern reportedly proclaiming, "There's a gulf, not a gap."

"Based on the proposal they originally sent us, which we viewed as a non-starter, maybe there is a gulf," said Fisher, who also underscored the progress that has been made over the past year.

Fisher said he feels the players' proposal hit its target, without question. "Both sides can agree or disagree on certain points, but we feel strongly that our proposal contained elements that can be beneficial for both sides, and could really be used as a starting point," he said. "So we'll see as this process unfolds, how close we stay to this particular proposal."

Is the system broken?

A casual observer might note that despite having a system that the league claims is broken, potential owners still line up to buy teams, and the most recent sale (the Golden State Warriors for $450 million) represents a record price for an NBA franchise. Stern disagrees with the implication. "[It's] in some measure because they think we're going to get a new collective bargaining agreement, to put it that simple," he said. "If somebody asked me whether a team is a good buy, my response is, 'You'd better hurry up, they're going like hot cakes, and they're going to be even more valuable when we get a system that is even more sustainable.'"

The most visible argument that the league may be in better shape than the owners claim came this summer, when teams spent wildly on free agents. How else to explain the contradiction when the teams complaining that player salaries are too high are the same teams signing these players to such exorbitant contracts?

"They get to police themselves," Hawks guard and players association vice president Maurice Evans told CBS.com. "The owners are the ones that are signing these deals. There's nothing in the CBA that says you have to do that, so why would we propose something that says you can't do that?"

Cash Still Flowing

A reported 12 teams lost money in 2008-09, but that didn't stop some from shelling out big-money deals this summer. Here's a glance at some of the largest offseason contracts:

• Joe Johnson, Hawks: 6 years, $120M
• LeBron James, Heat: 6 years, $110M
• Chris Bosh, Heat: 6 years, $110M
• Dwyane Wade, Heat: 6 yrs, $107M
• Amare Stoudemire, NY: 5 yr, $100M
• Rudy Gay, Grizzlies: 5 years, $81M
• Dirk Nowitzki, Mavs: 4 years, $80M
• David Lee, Warriors: 6 years, $80M
• Carlos Boozer, Bulls: 5 years, $75M
• Paul Pierce, Celtics: 4 years, $61M
• Ray Allen, Celtics: 2 years, $20M

It does beg the question, how can a league that says it's in such dire straits also spend so much on free agents? Perhaps the answer comes from the structure of the league, as an association of separate franchises. At times, the teams are a single entity, working in concert for their mutual best interest, but at other times they are 30 independent businesses, competing with each other for the same limited resources. "We want the owners within the rules to compete as hard as they can, because they buy our teams," Stern said. "Our teams compete. They're competitors."

It's not as simple as "just say no" when it comes to spending money on player salaries. There are only so many Wades, Carlos Boozers and Amare Stoudemires to go around, and teams all know that if they don't step up to the plate, another team will. "Our teams are urged and expected to compete as the hard as they can within the system," Stern said. "If they have cap room, owners spend it because they want to win. That's a good thing for our fans and a good thing for our players, but it isn't a great thing for our owners."

Teams can't simply get together and say, for example, Rudy Gay is an $8 million player, so let's not bid each other into oblivion for him. That's collusion, and it's illegal. So the onus is on the owners to ensure that appropriate rules are put in place during a time they are negotiating collectively with the players and working in concert rather than competing.

So in short, the league wants to replace what they see as a broken system with one where all 30 teams can turn a profit, and can afford to make the financial commitments necessary to compete for a title. "Our goal for our teams, our players, but particularly our fans, is to come up with a model that says that every NBA team can compete," Stern said in February.

On the other hand, Fisher said that a system in which every team can compete doesn't imply a system in which teams are insulated from the consequences of bad decisions. "We've run into situations where teams have either mismanaged spending, overpaid staff, or made decisions on rosters and personnel that weren't in their best interest -- things that we're now being asked to take the hit for," he said. "Each team needs to be responsible for running its business, and we don't have anything to do with the decisions they make. So why should we be asked to make concessions for mistakes on their end, which we had no control over?"

Stern and the league know that fixing the system will take more than convincing the players to take less. Changes to the way revenues are divided among the teams are also needed. Stern doesn't see it as an either-or issue. He said the league has already quadrupled the amount of money that is revenue-shared, and he intends to have a new model in place when the bargaining sessions conclude. "We are going to do it all at once," he said in February, terming it a "robust discussion" among the owners.

Although the gap between their positions is wide, the sides appear to be better situated to amicably resolve their differences than they were in 1998. This appears to be, at least partly, a result of the influence of Fisher, a veteran of the 1998-99 work stoppage and now the union president. In 1998 the players often appeared to be out of touch with the economic realities -- exemplified by then-union president Patrick Ewing's now-infamous quote, "Sure, we make a lot of money, but we spend a lot, too."

Life in a lockout

Fisher said today's players are aware of what's going on in the U.S. and around the world, and even though fewer than 10 percent of the players who experienced the lockout in 1998-99 are still in the league, they understand the impact another work stoppage would have. "I think everybody's smart enough to know. Even though they were probably 10 years old when the lockout happened in '99, they're smart enough to understand how [another lockout] would be bad for our business," he said.

Stern said the NBA has done its part to ensure the players are educated about the league's situation. "We've given [them] our certified financial statements," he said. "We've provided access to our tax returns, and we're awaiting their review of those, and if there's more needed, they'll get more. We've given the Players' Association more financial information than has ever been done in the history of sport."

Both sides hope that significant progress will be made as negotiations continue over the next year, and hope that a deal will get done before June 30. If they don't have a new agreement in place by that date -- when the current agreement expires -- the league will shut down. This is necessary because the league's operations are tied to the existence of a collective bargaining agreement. The CBA defines the playing field. For example, it establishes that teams have exclusive negotiating rights to its draft picks, which is what prevents all 30 teams from trying to sign the No. 1 pick. It defines minimum and maximum salaries, contract lengths, trade rules -- everything.

Players do not get paid in the event of a lockout. "Labor law permits employers to withhold compensation to employees during a lockout to make the lockout a more effective weapon in negotiations," said Gabriel Feldman, law professor and director of the Sports Law Program at Tulane Law School. "If employees were paid during a lockout, they would have less of an incentive to return to the bargaining table to negotiate."

That means that a work stoppage has to be viewed as a weapon in the league's arsenal. By cutting off most players' principal source of income, the owners will be putting a financial squeeze on the players to expedite a deal more favorable to the league. While the players may stick to their guns through the 2010-11 season and into the summer if there is a lockout, their outlook will begin to change once they miss their first paychecks on Nov. 15. This expectation may even increase the likelihood of a lockout, since the owners know the players will be more anxious to make a deal in December or January than in July, and may wait until they've softened the players up before getting down to serious negotiating.

Another way the owners could leverage a lengthy work stoppage is by taking advantage of the union operating under a "one player, one vote" system. The rank-and-file players greatly outnumber the superstars, so a proposal that gets everyone back to work at the cost of significantly reduced maximum salaries could pass by a significant margin when it goes up for a union vote.

Dobbs I'm preparing for a lockout right now, and I haven't seen anything to change that notion. Hopefully I'll see something over the next several months.

-- NBA union director Billy Hunter in July

The owners have the upper hand in the event of a lockout. They usually have more financial reserves, own other businesses that continue to provide income and act as a more coordinated and cohesive unit behind the commissioner. They are also relieved of their greatest expense (player salaries) along with the cost of putting on the games. The teams that are losing money are better off not playing at all than playing another season under the current system.

Some view a lockout as a foregone conclusion, and are planning accordingly. "I'm preparing for a lockout right now, and I haven't seen anything to change that notion," Hunter told ESPN.com. "As of this moment, it's full speed ahead for me in preparing the players for a worst-case scenario." Fisher, on the other hand, remains optimistic. "A lockout is not the end result that I want, nor any of our players, and if the owners aren't interested in having a lockout then we'll come to an agreement," he said.

If the owners hold the trump card in the form of a lockout, what countermeasures do the players have at their disposal? For one, union leadership consistently urges the players to be prepared for any contingency. "Part of our yearly mission, even in the first year of our collective bargaining agreement, is urging our players to be smart and savvy about their financial planning," Fisher said. "It's something we do every year, all year, and during a year before a potential lockout those messages are hammered home even more."

Effects on free-agent market

Players have also been acting individually to lock-in as many years as possible under the current agreement. Kobe Bryant, Pau Gasol and Manu Ginobili signed lucrative extensions this year. James, Chris Bosh, Amare Stoudemire, Paul Pierce and Dirk Nowitzki all exercised options to become free agents in 2010 rather than 2011 (which is one of the reasons the 2010 free agent class was so loaded with talent). The most notable signing was Richard Jefferson, who walked away from a $15.2 million salary to re-sign with the Spurs to a contract starting at $8.4 million with four years locked-in under the current CBA.

This also affects Anthony's situation. The Nuggets have a three-year extension on the table, but Anthony is reportedly unhappy in Denver, and would prefer to be traded elsewhere. Usually a player has the leverage in this situation. If the team doesn't trade him, he can leave as a free agent at the end of the season, leaving the team empty handed. But the current labor situation provides the Nuggets with some leverage. They can leave the extension on the table and let Anthony decide whether to accept it and lock in three additional years under the current agreement, like Bryant and the others, or take his chances as a free agent in 2011, risking the possibility of signing for much less under the rules that will be in place in the next agreement.

This is not to say the players who sign new contracts or extensions under the current agreement are necessarily safe. The current rules require a player's salary in the first year of an extension to not exceed the maximum salary. This determination is made in the year the extension takes effect. The extensions for Bryant, Gasol and (potentially) Anthony won't take effect until the next CBA is in place, so these players could find themselves constrained by a new maximum salary rule that provides for considerably less salary than they are currently scheduled to earn.

It is possible for existing salaries to be slashed across the board. It has been the NBA's practice to grandfather existing contracts into new agreements with new restrictions (such as further limitations on salaries or contract lengths) applying only to contracts signed after the new CBA takes effect. The league and players association are under no obligation to do this in the future, and could agree that new limitations apply retroactively to existing contracts or that all existing salaries be rolled-back by a given percentage to meet new revenue sharing targets. That happened with the NHL in conjunction with its 2004-05 labor dispute, in which the sides agreed to roll back salaries in all existing contracts by 24 percent.

The upshot of this is that locking in long-term deals under the current agreement -- either via a new contract or an extension -- could end up being for naught. Since we won't know what the new rules will be until we get there, it's still prudent for players to get what they can under the terms of the current CBA.

Another strategy at some individual players' disposal is to ply their trade elsewhere should a lockout occur. This option is only available to players who will be free agents in 2011 because players under contract to an NBA team will be unable to obtain the necessary clearance from FIBA to sign elsewhere, even in the event of a lockout. A few players might leave for Europe or China, but there likely won't be a sufficient number of defections to sway the negotiations. "I can't speculate on each individual guy and what their decision-making process would be," Fisher said. "I think that's part of the beauty of our game -- because we have so many players that are in different circumstances and from different parts of the world, they'd be free to make those decisions as they see best for themselves."

Desperate times ...

The real trump card in the players' hands might be union decertification. Many of the league's practices, such as the salary cap and draft, may violate antitrust laws, had they not been agreed to via collective bargaining. These practices are exempt from the antitrust laws only so long as they are part of the CBA. This exemption continues even after the CBA expires, as long as a "labor relationship" continues to exist. But this relationship would end if the union were decertified, because the players would be abandoning their collective bargaining rights and turning the players union into a non-union trade association.

Decertification would quickly be followed by an antitrust suit against the league, challenging its restraints against player movement and salaries. The salary cap, luxury tax, maximum salaries, limits on free agency, age limits and draft would all be under attack. Even the league's ability to stage a lockout would be challenged, and existing player contracts would likely become enforceable. "The league does not have a weapon in its arsenal that matches the potential threat of decertification and an antitrust suit," Feldman said.

The salary cap, luxury tax, maximum salaries, limits on free agency, age limits and draft would all be under attack.

This strategy is risky. Without the benefits of collective bargaining, every player would be left on his own to negotiate with teams. They would also cede their rights to pensions, benefits, minimum salaries and other protections. An antitrust suit subjects both sides to a long and expensive court battle.

Instead, the players are hoping that the one-two punch of decertification followed by an antitrust suit would motivate the league to negotiate toward a more favorable settlement and avoid the time, expense and uncertainty of litigation, along with the ensuing chaos. "The CBA is entirely tied to the existence of the union," Feldman said. "Without a union, there can be no collective bargaining. Without collective bargaining, there can be no collective bargaining agreement."

NFL players successfully used decertification to gain free agency in the early 1990s. NBA players came close to employing this strategy in 1995 and 1998, but voted against decertification both times. Fisher said they have a long way to go before they get to that point again. "I think decertification is always one of the strategies and potential opportunities that lie at the very end of this process," he said. "It's hard for me to say whether it will be viable or not at this time. I do view it as an option, but I would like to stay focused on the opportunity to not even have to get to that place."

It is likely that both sides were closely watching the recent American Needle case between the NFL and one of its licensees, in which the league argued that it is a single entity for all purposes and therefore incapable of violating the antitrust laws. A ruling in its favor would have made the NFL (and by extension, the NBA) immune to an antitrust lawsuit, rendering the decertification strategy worthless. Instead, the Supreme Court ruled against the league, and in doing so avoided changing the way professional sports leagues operate. "For all conceivable purposes, and after decades of litigating the issue, the single entity argument for professional sports leagues is dead," Feldman said.

Time running out

The 1998-99 lockout had enormous and long-lasting repercussions in the league's finances, image, public relations, attendance and television ratings. According to a CBS News-New York Times poll conducted during the lockout, nearly one out of three fans said the labor dispute lowered their opinion of professional basketball and of those in the business. Newsweek termed it "an incomprehensible and unconscionable dispute between rival gangs of millionaires." Stern later said, "We have some winning back of the fans to do."

As they stare into the abyss once more, both sides appear committed to avoiding a repeat of the events of 1998.

"That's something we want to work as hard as we can to stay away from," Fisher said. "It would have a domino effect on many levels, and be felt far and wide. Both sides have a greater understanding of the impact of NBA players and basketball around the world, and neither side wants to stop the growth of this game, because it's on a great trajectory."

"I don't know how many collective bargainings I've participated in over the last too many years," Stern said. "We've thus far only had one failure to reach a deal in 1998. And many of the others have started out poorly, [and also] had predictions of doom and gloom. You just keep on plugging."

Less than a year remains. The clock is ticking.

Larry Coon is the author of the NBA Salary Cap FAQ. Follow Larry on Twitter.