Unionization on the NBA
Last year, the National Basketball Association (NBA), its players and the owners of the 30 teams that employ those players engaged in the second-longest labor dispute in NBA history, resulting in a lockout and two lawsuits that delayed the season by sixteen games, which itself cost both sides regardless of the outcome of the disputed contractual negotiations. Although the players agreed to salary, earnings and contractual concessions, their union held out over free-agency rules and ultimately prevailed by decertifying their bargaining unit, which forced the dispute from the jurisdiction of labor law into anti-trust regulation. This review describes the situation and then analyzes the potential ramifications of unionization on the NBA, on which the court issued no new decision since both parties withdrew their suits after overcoming impasse. For the purpose of this discussion, the National Basketball Association or “NBA,” refers to the league itself, and analysis of the effects of unionization on the players and privately-owned teams who employ them would take different focus. Although the entire professional basketball system is often referred to as the NBA in general, here these other two groups will be designated the players and the teams who employ them, and reference to the NBA designates the league that regulates and organizes the teams for which the players work.
The League represents the owners of 30 professional basketball teams, setting rules that apply to roughly around 450 players of varying levels of expertise and experience. These players and the league have a history of negotiating employment contracts which currently amount to some $4 billion in revenue per year divided up between the NBA, owners and players (Beck, 2011, n.p.). The previous contract, available on the players’ union Web page (NBPA, 2012, n.p.) expired on 30 June, 2011, which resulted in a deadlock over the terms of a new contract that became so contentious the League and the players could not reach agreement in time to make the 2011-2012 start date. The result of that deadlock was a “lockout” of the players by the NBA, analogous to a factory owner preventing employees from entering the shop floor under U.S. labor law, and reciprocal actions by the players that brought about concessions by both sides and a new contract that allowed the season to begin, but only after missing several initial weeks. The new contract, which does not seem to be available to the public yet, achieved nearly $300 million in player salary reductions per year for the owners’ group along with new payroll terms and contractual restrictions, resulting in an estimated $3 billion increase in revenue for the league over the next 10 years (Beck, 2011). The players on their part prevented some restrictions on free agency, their major point of objection since they had agreed to salary and income reductions from “basketball-related income” (BRI) before the declaration of impasse.
The ultimate result was a new contractual agreement (which both sides have the option of canceling early after six years) after the players forced the NBA to return to the bargaining table using a negotiating tactic that required they disband their union. By decertifying their union, imposing free agency across the league for all players, the various teams of the League could no longer agree on or even discuss terms of employment without breaking federal antitrust law, where previously federal labor law had applied as long as the players chose to bargain as a unified group represented by the players’ union. This difference underlies any discussion of the results of unionization on the NBA, and resulted in the League or NBA returning to the table and relinquishing the last of demands the players found important enough to reject (Beck, 2011).
Professional sports has unique characteristics compared to other industries like say manufacturing or health services, in a general sense because there are few markets outside the League for players’ skills, and because owners must collaborate to a meaningfully higher degree that in a different industry would achieve illegal market power prohibited by anti-trust law (Feldman, 2012, p.1233-34). Section I of the Sherman Act prohibits competitors from collaborating in order to achieve reduced competition that undermines consumer choice or provision of labor in the marketplace (Feldman, 2012, p.1227). Increased competition between producers is allegedly in the consumers’ best interest because reduced competition leads to cartelization by a group of ‘oligopolistic’ producers acting together to artificially inflate prices (Feldman, 2012, p.1236-7). Such ‘antitrust’ cases are indeed prosecuted against producers by U.S. courts most every year (U.S. Department of Justice, 2012, n.p.), which indicates the strong incentive producers have to reduce competition between them such that the results is a cartel, or ‘oligopoly.’ In such cases, the courts step in effectively to represent the consumers against the producers, on the rationale that the consumers are the government’s constituents, and competition between producers encourages efficiency and lower prices for consumers and is therefore in the public interest. Since no individual consumer can achieve market power over the producers, the government represents all consumers. Therefore such producer collaboration is prohibited under the Sherman Act if the result reduces competition, under a thread of consumer and worker protection law with specific precedents designated under the heading ‘anti-trust’.
Once a group of workers votes to negotiate contractual terms of employment as a group, entirely the choice of the employees (Feldman, 2012, p. 1254), the result is a labor union, and the employment situation falls under the National Labor Relations Act (NLRA) and Labor-Management Relations Act (LMRA). The difference is critical, because as long as the players elect to negotiate as a group with the teams that pay them, the terms and conditions are regulated under NLRA, but the very moment the players elect to dissolve their union and negotiate conditions individually, then any collaboration between owners becomes viewed by the courts as cartelization in the process of selling the series of games that as a whole constitutes the annual professional basketball season, including the peripheral income derived from those games that often ends up larger than the direct ticket sales (Brandt, 2011, n.p.). Once the players elect to dissolve the union, the Sherman Act applies instead of the NLRA, which in 2011 forced the NBA to consider whether the teams wanted to compete against each other hiring all player-employees individually as free agents. Absent the players’ union, such owner collaboration would incur “treble damages” under the Sherman Act (Feldman, 2012, p. 1239) on grounds such collusion would result in deliberate reduction of competition between employers.
The League tried to argue that the whole intent of the Sherman Act is limited to consumer protection, but the Supreme Court has ruled anti-trust protection also applies to competition in labor markets (Feldman, 2012, p. 1274), so the risk for the owners arose from whether the Courts would find a link between owner collaboration and market power that harmed consumers or gained leverage over potential employees. If dealing with all players as free agents created an auction where owners had to bid up compensation attempting to capture talent, the result could mean higher cost for the team and thus lower revenue absent increased ticket prices or other revenue. Since there is no other market for consumers to purchase professional basketball of the essentially similar quality of the NBA, the increased prices would reduce consumer access if the result was increased revenue for the League, achieved through collaboration. The League was apparently losing some $300 million per year, which indicates increased cost would have to be offset by increased revenue either through ticket prices or other income, including BRI. If the owners attempted to collaborate in any way to restrict the players’ power to demand higher compensation (direct pay or noneconomic concessions), say through salary caps, and the courts could discover such agreement, the steep fines in addition to any increased pay the players could achieve, would require increasing revenue so high that many consumers would eventually forego tickets or merchandise, broadcasters would abandon licensing agreements, and these effects would ripple out through “any revenue-generating activity — from selling tickets to hot dogs to television rights to video games” (Brandt, 2011, n.p.).
The players have in the past negotiated the greater share of BRI revenue, but conceded that excess to the League down to a 50/50 split before the 2011 lockout. The cost of achieving that revenue is borne entirely by the League, however (Brandt, 2011); therefore increasing the total cost for a league that is already losing money and thus has no room to take profit reductions, would result in passing that cost on to consumers where players had the ability to negotiate compensation increases under total free agency across the league. These pay increases would affect different teams to varying degree depending on their profitability, and the result would be concentration of talent into the richest, dominant teams, reducing competitiveness for consumers alongside ticket and peripheral price increases for teams with the narrowest profit margins. Total free agency would also create an incentive for less-skilled players to bid down wages in order to secure employment due to the lack of an alternative market for specialized skills, at the same time the most-productive players would have the power to hold out for the best offers. The result is an increasing gap between the richest and poorest teams that would reinforce disparities around and earning power, concentrating productivity into monopolistic dominant teams with a concommitant reduction of competition in play and consumer price. The result is less competition for higher prices and restricted options for most employees.
Under a bargaining agreement negotiated with a players’ union on the other hand, all employers could offer baseline salaries negotiated with players at various tiers, based on productivity, tenure or any legal conditions the teams collaborated to offer should the players agree, which could result in salary reductions, salary caps, various distribution of BRI revenue and perhaps reduced ‘frictional cost’ of having to bid for talent every season (Feldman, 2012, p. 1233). This stability could reduce turnover and search cost and thus slow ticket price increases, and then if players agreed to additional free agent conditions in the negotiated contract, leave additional revenue for enticing elite talent to enhance the drawing power of the necessary but lower-skilled core team. The players conceded to many of these very conditions in the 2011 negotiations prior to the impasse, and then dissolving their union and thus taking away the owners’ ability to collaborate without incurring draconian penalties under anti-trust regulation. Furthermore, as long as the players are still represented by a union, even after the prior contract expires, the League has the right under NLRA either to uphold the terms of the prior, expired contract, or to impose the “last, best and final offer” immediately prior to declaration of impasse (Feldman, 2012, p. 1240). The moment the players decertify, however, the employers can define any terms they want, but the players can, and did, sue over any collaboration (Beck, 2011, n.p.). The League and teams had already preemptively sued for immunity for the lockout before the players’ vote to decertify (Feldman, 2012, p. 1252).
The union and League reached impasse over the owners’ ability to offer unlimited compensation for free agents above and beyond core compensation as per the prior agreement (Article XI, NBPA, 2009, p. 237). The players decertified after federal arbitration and filed suit under the Sherman Act because the League wanted to restrict the amount individual teams could pay the most-productive superstars, which could have the effect of increasing the lower-earning teams’ ability to compete for elite talent (Beck, 2011). The NBA tried to argue that the League should be exempt from anti-trust prosecution on a number of grounds, but since both lawsuits were dropped, no new ruling settled the issue (Feldman, 2012, p. 1252). Ironically, the League ended up conceding to the union’s final demand that free agents be allowed to negotiate compensation above and beyond contractual limits, which could be seen to reduce competition if the wealthiest teams could achieve higher income bidding up compensation for the most-elite players. The owners offset this by a revenue-redistribution tax on such spending, which will underwrite subsidies for lower-earning teams (Beck, 2011) along with players’ earnings concessions achieved before the bargaining impasse. The players aimed to and achieved increased competitiveness for the highest-earning elite players, but the League aimed to and perhaps achieved increased competitiveness for the entire system, by relinquishing bargaining power to the most-competitive free agents above and beyond the collective agreement negotiated with the wider players’ union. At the same time, shorter contracts under the new agreement would seem to increase player diversity across the various teams, while reducing employer savings from lower turnover and ‘search’ cost at the same time streamlining renegotiations under a blanket contract. These agreements required the players to reconstitute their union, which they voted for in due order by 1 Dec. 2011 (Sandler, 2011, n.p.). This entailed both parties first drop their competing suits, after both of which events the League and recertified players’ union were able to sign the contract that allowed launch of a delayed and shortened 2011-2012 NBA season.
Both sides in the NBA-player dispute gave up concessions in order to field a season at all, after sacrificing revenue from missed games they both would have shared. The reason the two sides failed to reach agreement was over salary caps for the highest-earning players, which the League argued would increase competitiveness for the lowest-earning teams. The players forced the owners back to the table by voting to decertify their union, which achieved a different legal jurisdiction where the owners could not collaborate in setting employment conditions. The players found it worth agreeing to extensive earnings concessions in order to achieve a durable employment contract, but the owners had to capitulate to preserve their right to collaborate in much the same way. The owners ended up achieving free-agent compensation caps indirectly by penalizing teams instead of capping salaries, and the players recertified their union. Since both sides dropped their lawsuits as condition of agreement, the courts added no new precedent to the existing case law and so there is nothing to prevent the very same situation from arising again in six years when the first opportunity for renegotiation matures.
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