Can Dan Gilbert Offer His Team to Keep LeBron James?

The Cavaliers would likely do anything to keep LeBron James in free agency this summer—but can they offer him a piece of the team? The Crossover examines Dan Gilbert's options.

LeBron James is averaging 0.9 blocks and 1.5 steals per game this season, but that doesn't include all the rejections and deflections he’s lodged when asked about his future plans. The best basketball player on the planet may opt out of the final year of his three-year, $100 million deal with the Cavaliers, and thus becoming a free agent July 1. “Where will LeBron play next season?” may edge out “Can anyone beat the Warriors?” as the NBA’s great parlor game question of 2018.

For now, we have no answers. James may test the market. He may stay in Cleveland. He may test the market and stay in Cleveland. He may decamp to Los Angeles, where, through a limited liability company, James and his wife, Savannah Brinson, own two mansions in Brentwood—one purchased in 2015 for $21 million and another purchased last November for $23 million. He may be swayed by billboards—suddenly, a voguish advertising medium—and end up in Philly. But as Richard Jefferson, James’s former teammate, rightly put it last week, “no one knows” how the plot will break. 

Still, before handicapping the LeBron sweepstakes, know this:

• “It’s about the money.” Really, it’s not. James is reportedly closing in on half a billion dollars in net worth. At this stage in his career, his life, and his financial maturity, it’s intensely unlikely that money will guide him. Cleveland can offer James more in salary than any other team can. Article VII of the NBA’s Collective Bargaining Agreement details the “veteran free agent exception,” more popularly known as the “Larry Bird exception.” The exception permits teams to exceed the salary cap in order to re-sign players who meet certain criteria—James qualifies. Through the exception, the Cavs could offer James 8% annual salary increases whereas other teams could offer only 5% annual increases. But this is unlikely to impact the decision of an athlete who makes more in off-court income than in salary, and will reportedly earn more than $80 million this year alone.

Cleveland fans might also remind James of California’s state income tax, which, at 13.3%, is decidedly higher than the 5% James pays in Ohio. The state tax rate differential is even more impactful under the new Federal Tax Cuts and Jobs Act. As explained in this recent SI article on Jimmy Garoppolo, the new tax law significantly restricts the ability of taxpayers who itemize—and high earners like James usually itemize—to deduct the dollars they spend paying state and local taxes from their federal income taxes.

The Cavs and their supporters could highlight the dramatic cost of living difference between living in Cleveland and living in Los Angeles. According to BankRate.com, a person who moves from Cleveland to Los Angeles would require a pay increase of 61% to maintain the same standard of living.

But, again, these are unlikely to be persuasive arguments. And they can be countered. The Lakers and Clippers could assert that, if James were based in L.A., he could improve his endorsement income. Texas and Florida teams could stress the lack of state of income tax. 

It’s not often that a workplace negotiation doesn’t distill to putting together the best compensation package. This is that rare instance.

•LeBron’s age will be a non-factor. Yes, in December, he turns 34, an age at which most NBA players are firmly entrenched in a state of decline. All the more so a player who started his career as a teenager, played more than 1,100 regular games, and another 217 in the postseason. 

But the conventional metrics fail here. For all his superlatives, LeBron’s durability might be his most extraordinary virtue. Statistically, there’s very little to suggest any drop-off in his game. It’s not simply that, in this MVP-caliber season, James is averaging 27 points, and shooting, rebounding and assisting above his career average. He’s doing it with little discernible change in his playing style or positioning. This may owe to LeBron's indestructible physique, his habit of dispensing more contact than he absorbs. This may be the legacy of his shrewd ability to ration his energy during the regular season. This may be a function of this era, when 40-year-old quarterbacks win MVP awards, 36-year-old tennis players win Grand Slam titles and Ichiro Suzuki plays baseball at age 44. 

But traditional analytics for the life cycle of an NBA player do not apply. Reports to the contrary, LeBron is not looking at this as a final act in his golden career. Teams will not envision that way either.

• Maybe most interestingly… Dan Gilbert, the Cavs’ owner, can appeal to LeBron's sentiments for northeast Ohio. He can explain that no NBA immortal—Jordan, Kobe, Magic, Bird, Wilt, Russell, Kareem—has played for more than three franchises in his career. He can blow up the team roster every trade deadline. But can Gilbert, as some have suggested, offer James the right to buy a sizable, even majority, stake in the Cavaliers when he eventually retires?

The answer is no, and let us explain why.

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The Collective Bargaining Agreement (CBA) would not let James have an option to buy the Cavaliers in conjunction with a playing contract

The CBA is designed to accomplish a number of goals. Two of those goals are avoidance of conflicts of interest and preventing teams from circumventing the salary cap. Both would be relevant considerations if Gilbert contracted to James the right to buy the Cavs.

First consider Section 11 of Article XXIX of the CBA. It makes clear that, “no NBA player may acquire or hold a direct or indirect interest in the ownership of any NBA Team or in any company or entity, whether privately or publicly owned, that owns anyinterest in any NBA Team.” James’s obtaining a right-to-buy the Cavaliers would clearly constitute the acquisition of an “interest in the ownership” of the Cavaliers. The NBA would not approve a contract that contains such a provision.

The NBA has also been vigilant in ensuring that players and owners avoid intermingling their business interests. In 2012, the league informed Boston Celtics forward Kevin Garnett that he could not purchase equity in the Italian soccer team AS Roma. The reason: AS Roma’s principal owner, James Pallotta, owned a piece of the Celtics. Although the connection between Garnett’s prospective ownership in an Italian soccer team and his employment with the Celtics would have seemed incidental, the NBA wanted to avoid any possibility that Garnett could be compensated by the Celtics—or by any of its owners—outside of his NBA contract.

The Garnett example leads to a second relevant clause in the CBA. Article XIII forbids owners from attempting to circumvent the CBA by (among other things) compensating a player for his basketball services in ways apart from the player’s NBA contract. To that end, Article XIII expressly prohibits any unauthorized agreements between teams and players. This prohibition is designed to prevent conflicts of interest and also prevent teams from circumventing the salary cap.

The Minnesota Timberwolves are well aware of this prohibition. In 1999, T-Wolves owner Glen Taylor reached a “secret agreement” with free agent forward Joe Smith. Smith, the first overall pick in the 1995 NBA Draft, was 23 years old at the time and coming off a season in which he averaged 15 points and 6 rebounds a game for the Golden State Warriors and the Philadelphia 76ers. To the surprise of many, Smith agreed to a one-year contract with Minnesota worth only $1.75 million. He was expected to command at least three times that amount on the open market.

Sensing that something was amiss, the NBA investigated and discovered that the one-year contract reported by the Timberwolves was only one piece of a multi-step arrangement with Smith. Taylor had negotiated an under-the-table scheme with Smith’s representatives whereby Smith would accept below-market money in the short-term. This portion of the arrangement enabled the Timberwolves to sign Smith while remaining compliant with the salary cap. In exchange, the Timberwolves agreed to multiple future contracts with Smith that, by 2008, would have paid him as much as $86 million.

In response, the NBA declared Smith a free agent. The league then turned its attention to the Timberwolves. In severely punishing the team, the NBA wanted to ensure that no other team would ever attempt such a salary cap circumvention scheme. So it was that the NBA stripped the Timberwolves of five first–round draft picks and also imposed a $3.5 million fine.

Could James be given an option to buy the Cavaliers upon retirement? 

No. This, too, would trigger conflicts of interest. In addition to express prohibitions contained in the CBA, the idea of a current player gaining a right to own a team would raise numerous conflicts of interest. For instance, where would James’s loyalties lie when it came to labor-management relations? As a dues-paying member of the National Basketball Players’ Association, James would be expected to look out for the best interests of players. (This is especially true of James, who is first vice president of the NBPA and is thus actively involved in bargaining with the owners.) 

Preempting the question: No, a “handshake agreement” between James and Gilbert wouldn’t work, either.

Such a “secret” promise wouldn’t be subject to NBA approval since the league wouldn’t, presumably, know about it (that’s the whole point of it being a secret!). But such an agreement would nonetheless be problematic and potentially place Gilbert in hot water with the league.

For one, the arrangement would sound much like the aforementioned Joe Smith-Timberwolves arrangement: a team deceptively reports to the league only one piece of a broader financial arrangement with a player. James would be compensated outside of the salary cap in that he would obtain a right-to-buy as a condition of signing a player contract. If the league discovered the arrangement, the league would likely void James’s contract and punish the Cavs.

Second, James would have to accept the legal risk that a handshake agreement wouldn’t be enforceable if Gilbert later changed his mind or if Gilbert sold or transferred the team before James retired. Ohio, like other states, recognizes the “Statute of Frauds.” It dictates that the enforceability of contracts that can’t be completed within one year is contingent upon their being in writing. If James signed a multiyear contract to play for the Cavs, any side oral agreement to buy the Cavaliers upon his retirement would presumably be timed to run multiple years as well. Of course, if the side agreement were in writing, this particular concern wouldn’t apply—but, as explained elsewhere in this article, a written agreement would beget other problems.

It’s possible that a side deal with James could lead the league and owners to assert that Gilbert violated the league constitution—a legal document that governs the relationship between owners and the league itself. Article 3 of the constitution bars owners from creating conflicts of interest. And Article 13 empowers a ¾ majority of teams’ principal owners to vote to terminate the membership of any owner who willfully violates the constitution, attempts to transfer ownership without proper consent, fails to fulfill contractual obligations or commits other types of offenses. While the league has not employed such a sanction, it planned to do so against former Clippers owner Donald Sterling before his wife, Shelly Sterling, wrestled control of the franchise away from him.

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Even if his fellow owners didn’t punish Gilbert for reaching a side deal or secret deal with James, those owners might refuse to approve a transfer of ownership between Gilbert and James. Under the league constitution, such a transfer would require approval by at least 3/4 of principal owners. Those owners could reason that James would have come into an ownership right through a deceptive practice. 

In a very indirect way, James could potentially buy a very small stake in the Cavs. The same is true of any player under a certain set of conditions. Under Article XXIX of the CBA, James could purchase publicly traded securities that constitute less than five percent of the ownership interests in a company or entity that directly or indirectly owns the Cavs. Confused? Essentially, if publicly traded securities own less than 5% of a company that owns a stake in the Cavs, James could buy into those securities. Such an arrangement would give James no actual ownership of the Cavs nor any control over the team (whether James already controls the Cavs as a player is a separate topic).

The best advice for the Cavs: make the best pitch to James that’s also compliant with the rules. The Cavs knows LeBron better than any other team does. They know his emotional sports, his priorities, his values and his possible concerns. They should use that to their advantage.

And then, when James retires as a player years from now, he and Gilbert can have as many discussions as they like about buying a piece of the Cavs.