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A Line in the Ice: The Kovalchuk Contract and the NHL's Financial Future

Jul 26, 2010 – 6:07 PM
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Jon Weinbach

Jon Weinbach %BloggerTitle%

It's summer in the National Hockey League -- the perfect time to prepare fans for another labor war. Who cares that the Chicago Blackhawks won their first Stanley Cup in 50 years? "Salary cap circumvention" is a much more appealing topic.

And make no mistake: by rejecting Ilya Kovalchuk's 17-year, $102 million contract with the New Jersey Devils last week, the NHL has drawn a line in the sand -- er, ice -- for another legal battle against its players. The league's action is really a preview of upcoming -- and likely difficult -- negotiations on the league's collective bargaining agreement, which expires after the 2011-12 season. The NHL wants to close a loophole in the CBA that permits ultra-long, "front-loaded" deals, and it's going to the mat on the issue by taking on Kovalchuk, one of the league's brightest stars, and the Devils, arguably the league's model franchise.

Earlier Monday, the NHL players' union responded by filing a grievance on behalf of Kovalachuk, the 27-year-old Russian sniper who has averaged more than 40 goals per season during his eight-year career. Now the league and union must agree on an arbitrator, who will then issue a final decision on the contract's validity. The Devils and Kovalchuk's agent could re-work the contract to the satisfaction of the NHL but that appears unlikely, at least in the short term.

No matter the outcome, the Kovalchuk case is already a public relations snafu for a league that struggles for attention even in the best of times -- and with one franchise without an owner (Phoenix), another for sale (Dallas) and at least three others looking for cash infusions from new investors (Carolina, Atlanta and Anaheim), this is hardly hockey's golden age. More broadly, the case sheds unfavorable light on the league's financial health, NHL commissioner Gary Bettman and the NHL Players Association, which has been in disarray for several years. Last summer, the union fired executive director Paul Kelly, just two years after it ousted Ted Saskin, Kelly's predecessor, for spying on players' emails.

Bettman has issued no public comment on the matter. The league's only statement on the contract was a terse, 113-word press release that called the contract a "circumvention" of the CBA, which went into effect in 2005 after a year-long work stoppage that wiped out a season.

"If something is permitted by the collective bargaining agreement, then by definition it can never be circumvention."
-- Jeffrey Kessler, Attorney Who Has Represented Player Unions
Sports leagues have largely been unsuccessful in similar previous cases. In the late '90s, the NFL lost when it tried to invalidate the contracts of several players, including quarterback Elvis Grbac, who signed deals that featured large signing bonuses, long terms and low annual salaries. Those contracts were created to take advantage of how the NFL calculates a player's annual "cap number," i.e. the amount that counts against the team's annual allotment.

For the purposes of determining an NFL player's cap number, the league's labor deal said signing bonus money could be amortized over the life of the contract, while annual salaries counted in full.

Once teams and player agents figured that out, contracts with huge bonuses and relatively paltry "salaries" became the norm -- and the NFL did not like it. The league did not want teams using accounting tricks to mask what they were really spending on payroll, and it felt such maneuvers were an end-around the essence of the salary cap. But the NFL lost in court, and those contracts have become the accepted standard in pro football.

"If something is permitted by the collective bargaining agreement, then by definition it can never be circumvention," says attorney Jeffrey Kessler, who has represented the players unions of the NBA, NFL and NHL in numerous labor disputes.

The fracas over Kovalchuk's deal is strikingly similar. The NHL labor agreement has no limits on contract length and there's a strict salary cap. (Next season's cap is just over $59 million.) A player's annual cap number is calculated simply by taking the average of the player's total compensation over the life of his contract, so a player with a five-year, $20 million contract has a cap number of $4 million. As in the NFL, NHL teams and agents quickly figured out that long, front-loaded contracts were effective -- and legal -- tools to keep player salaries high and allow clubs to manage their rosters under the constraints of the cap.

Kovalchuk's contract, which the Devils announced enthusiastically at a press conference last Tuesday, would be the longest in NHL history and is scheduled to continue paying him until he's 44 years old. The vast majority of his compensation -- $98.5 million, to be exact -- is scheduled to be paid in the first 11 years of the contract. His annual salary drops dramatically during the final six seasons of the deal, cliff-diving from $11 million in Year ten to just $550,000 in each of the contract's last five seasons.

And all of that is perfectly kosher. While Kovalchuk's deal would set a new benchmark for total years, it's hardly the first super-sized contract signed under the current CBA. In the last two years, all-stars such as Washington Capitals sniper Alex Ovechkin, Vancouver Canucks goalie Roberto Luongo, Chicago forward Marian Hossa and Detroit Red Wings stalwarts Henrik Zetterberg and John Franzen have all signed deals that stretch over ten or more years.

Such deals are "a creative way for a player to get his money and help teams at the same time," says veteran agent Pat Brisson of Creative Artists Agency, which represents Daniel Briere of the Philadelphia Flyers and Anze Kopitar of the Los Angeles Kings, among others. Both those players, incidentally, have long-term deals. Briere signed an eight-year, $52 million deal in 2007, while Kopitar agreed to a seven-year, $47.6 million extension in 2008.

For the league, however, the long-term deals fly in the face of Bettman's insistence on relative salary parity among teams and "cost certainty" for every franchise. From the league's perspective, according to one former owner, the low "cap numbers" on these long deals mask what teams are actually spending on annual salaries -- and thereby weaken the league's ability to reign in reckless spending.

The NHL reviewed several previous deals for possible violations, but in the end approved all of them, including the 12-year contract Hossa signed last summer. That precedent will be difficult to overcome in arbitration hearings, according to veteran labor attorney Jim Quinn, who heads the sports practice at Weil, Gotshal and Manges in New York. Nonetheless, says Quinn, there's little risk for the the NHL in pursuing the Kovalchuk case, which is the first arbitration of its kind under the league's current labor deal.

"If they win, it's a huge win, and if they lose, they'll just make contract length a bigger point in the next collective bargaining agreement," says Quinn, who represented the NBA players during the 1998-99 owners' lockout. "I don't think we've heard the last argument on this issue."
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