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October 27, 1993

JUNIOR BRIDGEMAN, David Robinson, Armon Gilliam, Reggie Williams, Jose Ortiz, Rory Sparrow, Darrell Walker, Phil Hubbard, Ken Barlow, and National Basketball Players Association, on behalf of themselves and all class members, Plaintiffs,
NATIONAL BASKETBALL ASSOCIATION, Atlanta Hawks, Ltd., Boston Celtics Limited Partnership, Capital Bullets Basketball Club, Inc., Chicago Professional Sports Limited Partnership, Dallas Basketball Limited, Denver Nuggets Entertainment Co., L.P., Detroit Pistons Basketball Co., Golden State Warriors, A California Limited Partnership, Houston Rockets Pro Basketball Club Ltd., Jazz Basketball Investors, Jerry H. Buss, d/b/a California Sports and the Los Angeles Lakers, Kings Professional Basketball Club, Inc., LAC Basketball Club, Inc., Meadowlands Basketball Associates, t/a New Jersey Nets, Milwaukee Bucks, Inc., National Advertising Service, Inc., Cleveland Cavaliers Division, New York Knickerbockers Basketball, a division of Madison Square Garden Center, Inc., Pacers Basketball Corp., The Philadelphia 76ers Basketball Club, Inc., Phoenix Professional Basketball Club, Ltd., Pro Basketball, Inc., Seattle Supersonics, Inc., Spurs Professional Basketball Club, Ltd., Defendants. RE: Chris Dudley

The opinion of the court was delivered by: DICKINSON R. DEBEVOISE

 DEBEVOISE, District Judge.

 On September 12, 1993 the NBA filed Objections to the Special Master's Report. The National Basketball Players Association ("NBPA"), the Bridgeman Class, Chris Dudley ("Dudley"), Portland and The Chicago Bulls filed papers in opposition to the Objections.

 At the conclusion of the final hearing before the Special Master on August 30, 1993 the NBA raised a new contention, namely, that if a one-year out has value, then that value should be added to the player's salary for purpose of computing whether the salary cap is exceeded. For reasons which will be noted later in this opinion the Special Master concluded that the contention was not relevant to the Portland/Dudley case but that it was relevant to one-year out contracts generally and in particular to contracts between the Atlanta Hawks and Craig Ehlo and The Chicago Bulls and Toni Kukoc. The Special Master scheduled a further hearing on that issue and on September 24 he heard argument and received documentary evidence.

 On September 28 the Special Master issued his Report #29 in which he concluded that a one-year out is not "compensation" under Article VII, Part A, Section 1(C) and that if the court should ultimately conclude that the value of one-year outs in multiyear contracts should be added to salary for salary cap purposes, the NBA should apply such rule only in futuro and not to the contracts between Atlanta and Ehlo and Chicago and Kukoc.

 On October 5, 1993 the NBA filed Objections to Report #29. All the parties agreed that the Objections to both Report 28 and Report 29 would be dealt with at the October 12, 1993 hearing which I had scheduled. The hearing was held and this constitutes my findings of fact and conclusions.

 I. The Facts

 The rights and obligations of the parties are set forth in the BSA, a comprehensive agreement settling this case arrived at after extensive negotiations. The Collective Bargaining Agreement "CBA" contains the same terms. Under the BSA a player can become a free agent after four years in the NBA; an initial salary can be increased by 30% of the initial amount each year of a contract; a team can re-sign one of its own players upon the expiration of his contract without regard to the salary cap, but all other teams are subject to the salary cap provisions; there can be no renegotiation of a contract during its first year.

 Some contracts contain provisions granting the player an option to terminate his contract, at which time the player becomes a free agent. An option to terminate a multiyear contract after one year has been referred to in these proceedings as a "one-year out" provision.

 The events which gave rise to proceedings before the Special Master are set forth succinctly in his Report as follows:

Chris Dudley is a six-year veteran player who completed a three year contract with the New Jersey Nets on June 30, 1993. His salary last year was $ 1,200,000. He has been a valuable player, but not a starter.
Dudley played as a back-up center for New Jersey and aspired to become a starting center on a championship caliber team.
Prior to July 1, 1993, while still under contract to New Jersey, Dudley and his agent Dan Fegan had negotiations with that team for a new contract. New Jersey was not limited by the salary cap with respect to Dudley and made him an offer of a seven-year contract with six years fully guaranteed and the seventh year partly guaranteed.

  1993-94 $ 1,560,000 1994-95 2,028,000 1995-96 2,496,000 1996-97 2,964,000 1997-98 3,432,000 1998-99 3,900,000 1999-2000 4,368,000 Total 20,748,000 (Ex. 7)

Dudley's agent, Fegan, had made a study of salaries for starting centers in the NBA (Ex. 12), and he and Dudley concluded that the offer was not sufficient for someone of Dudley's skills and playing time. The offer was then withdrawn by New Jersey, although there is evidence that it, or something close to it, would have been available if Dudley had showed serious interest in it.
Fegan continued to have conversations with New Jersey, but for whatever reason no further offer was received.
Fegan had some talks with Phoenix, a championship caliber team, which had room under its salary cap for a six-year contract averaging $ 3,307,000 per year, but no firm offer was received. There were also some conversations with Detroit, but no offer resulted.
In the meantime, and beginning on July 1st or 2nd, negotiations had begun with Portland. This team was particularly attractive to Dudley because it was of championship caliber, it had no natural center, it played a style of basketball that he thought would "showcase" his skills and it was located on the West Coast where he lived. (Tr. 533)
The problem was that Portland had no room under its salary cap. Portland has had an exceptional record over the last four years -- three Western Conference Championships and two NBA finals -- and was not willing to remove any highly paid stars from its roster. It was willing to trade a lesser player and open up a $ 790,000 slot. In view of Dudley's negotiations with New Jersey and Phoenix, however, a contract starting at $ 790,000 -- without more -- would be of no interest to him. Geoffrey Petrie, the man in charge of Portland basketball operations, explained the situation to his superiors in a memorandum dated July 2, 1993 and suggested "putting an opt out into the long-term contract at $ 790,000." (Ex. 6) Such an opt-out would give Dudley the right to become a free agent again after one year. If he did opt out, Portland would be able to pay him without regard to the salary cap.
Dudley and Fegan met the Portland management; they were given the royal treatment; they were shown around the city; they met the owner, Paul Allen, and visited his yacht and new home; they liked what they were told about the team's style of play and the skills of its players which were said to complement Dudley's skills. Although they were given no assurances about Dudley's player status, they were optimistic that he would be the starting center because Portland had no other natural center.
On August 3, 1993 Dudley and Portland entered into a seven-year fully guaranteed contract for annual salaries as follows (representing an initial salary of $ 790,000 and thereafter the 30% annual increases permitted by the salary cap):

  1993-94 $ 790,000 1994-95 1,027,000 1995-96 1,264,000 1996-97 1,501,000 1997-98 1,738,000 1998-99 1,975,000 1999-2000 2,212,000 Total $ 10,512,000

The salary was only half of the salary which New Jersey had offered in late June, but there was an important, additional provision -- a one-year out.

 The NBA challenged the Dudley contract on the grounds that (i) by its terms it constitutes cap circumvention under Article VII, Part H, Section 3 of the BSA and (ii) the circumstances reflect an unwritten understanding concerning future renegotiations of the contract in violation of Article VII, Part H, Section 4(a)(2) of the BSA.

 In July 1993 the NBA had raised the issue of the propriety of one-year outs in multiyear contracts before the Impartial Arbitrator under the CBA in connection with a contract which Craig Ehlo had entered into with the Atlanta Hawks and a contract which Toni Kukoc had entered into with the Chicago Bulls. The NBA contended that such options were impermissible amendments to the Uniform Player Contract under the CBA.

 The NBPA argued that, by virtue of provisions both of the CBA and the BSA, the dispute should be referred to the Special Master. In his July 29, 1993 opinion the Impartial Arbitrator ruled that: "The Special Master must, in the Arbitrator's opinion, be accorded [an] opportunity to address [the issue of what significance, if any, the cited provisions of Articles VI, and VII have for the question whether the contract clauses at issue are allowable Uniform Player Contract amendments]."

 By letters dated July 30 and August 2, 1993 the NBPA requested the Special Master to address the jurisdictional issue and also the issues which the NBA had raised. By letter dated August 6, 1993 the NBA commenced a proceeding before the Special Master seeking remedies for an alleged violation of the CBA and BSA by Dudley and Trail Blazers in agreeing to the multiyear contract with the one-year out option for Dudley. By agreement the Special Master was to hear the Kukoc and Ehlo matters as well as the NBA claims concerning the Portland/Dudley contract. However, the proceedings to date and Report #28 have developed the facts only as they relate to the Dudley contract.

 The parties took discovery in the form of depositions and production of documents. The Special Master held a hearing on the merits on August 25 and 26, 1993 limited to the Dudley contract, at which time witnesses were heard and documents received in evidence. On August 30, 1993 the Special Master heard oral argument. He issued his Report #28 on September 7, 1993. After a further hearing he issued his Report #29 on September 28, 1993.

 II. The Special Master's Decision

 In Report #28 the Special Master defined the issues to be decided by him as follows:

1. Does a multiyear contract with a one-year out, the exercise of which will make the player a free agent, constitute per se cap circumvention?
2. Do Articles VI and VII of the BSA contemplate that there may be player options in multiyear contracts to lengthen or shorten the contracts?
3. In the circumstances of this case, does the Dudley/Portland contract constitute cap circumvention under Article VII, Part H, Section 2?
4. In the circumstances of this case, was there an unwritten understanding concerning future renegotiation of Dudley's contract with Portland in violation of Article VII, Part H, Section 4?

 Before summarizing the salient points of the Special Master's decision it would be useful to set forth certain of the BSA provisions upon which the parties rely.

 Article VII of the BSA, Parts A-G, contains detailed, complex provisions governing team salaries, the salary cap and minimum team salaries. Insofar as is relevant here these provisions require the NBA to pay its players, annually and on a league-wide basis, an amount equal to 53% of the NBA's revenues in aggregate salaries and benefits. They require that each team's total payroll exceed a fixed "Minimum Team Salary". The amount each team can pay in any given year in total salaries is limited to a "Maximum Team Salary" or "Salary Cap". The purpose of the Salary Cap is to preserve team competition throughout the entire league by preventing the richest teams from taking the bulk of the best players to the disadvantage of less well-situated teams. There are certain exceptions to the Salary ...

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