How the NBA's Clash With China Could Lead to Legal Disputes

In light of the Daryl Morey tweet controversy and its fallout, the NBA will need to reconsider its plans for operations in China.

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NBA commissioner Adam Silver on Tuesday clarified the NBA’s position on Houston Rockets general manager Daryl Morey’s tweet in support of protesters in Hong Kong. In a press conference in Tokyo, Silver pointedly asserted that the NBA supports freedom of expression on political and social topics, even if it comes at the cost of growing the league’s business. To that end, Silver stressed “the long-held values of the NBA are to support freedom of expression, and certainly freedom of expression by members of the NBA community” and that Morey invoked this right.

Silver also released a written statement in which he noted, “[T]he NBA will not put itself in a position of regulating what players, employees and team owners say or will not say on these issues. We simply could not operate that way.”

While Silver’s remarks will likely temper U.S.-based criticisms for the NBA initially expressing regret that Morey may have “deeply offended” the league’s “friends and fans in China,” this clarified position has not been well-received in China. As explained below, it could lead to a substantial loss of business and litigation.

Freedom of expression at the core of the dispute

Silver’s explicit affirmation of the “freedom of expression” is an important development. He went beyond where NBA rules required him to go and did so at risk to his league.

The scope and applicability of the freedom of expression is sometimes misunderstood. Americans enjoy a First Amendment right to express political and social views without fear of government prosecution or law enforcement sanction. There are assorted exceptions to this general right—including with respect to certain types of threats, school speech and pornographic materials—but, by and large, we can express ourselves without fear of being arrested and sent to jail.

This freedom should not be confused with employment protection. The First Amendment does not safeguard employees from sanction by their employers, particularly employers in the private sector as they are (mostly) not obligated to adhere to Constitutional requirements. Employment contracts and workplace conduct and social media policies may, and often do, impose constraints on employee behavior and speech that are otherwise protected by the First Amendment.

Put bluntly, what you say probably won’t get you arrested, but it might get you suspended from work or even fired.

This is true in many different industries, including in media (Jemele Hill tweeting that fans should boycott companies which advertise with the Dallas Cowboys being a notable example), entertainment (an actor tweeting plot spoilers led to a dismissal) and sports (Pittsburgh Steelers running back Rashard Mendenhall’s controversial tweets about the September 11 attacks led to his firing by an endorsed company).

The NBA is no different. The league has adopted rules in both its constitution and collective bargaining agreement that empower the league and its teams to punish owners, executives, coaches and players for all sorts of expressions.

Here’s a sample:

Promises that tamper. Criticisms of referees, including by tweet. Swearing at referees. Offering praise for tanking. Unauthorized contract negotiations. Raising one’s middle finger at fans. Cursing at fans.

Each is an expression that has brought about league punishments. Each also undermines league operations, particularly in regard to the protection of competitiveness and fairness. Teams that tamper gain an unfair advantage. Teams that deliberately lose games betray their obligation to competitive play. Players that swear at fans tarnish not only their own reputation but also that of players in general and their team.

Yet the NBA has adopted a much more permissive approach to political expressions. Simply put, the league has not punished owners, executives, coaches or players for social commentary. Although most persons connected to the NBA seem to eschew political commentary, there are exceptions. A number of players and coaches have endorsed political figures and denounced others. LeBron James, in particular, has been active in the political space, both with respect to supporting candidates and also advocating for legislation—with California’s Fair Pay to Play Act serving as a relevant example. Likewise, Golden State coach Steve Kerr has been outspoken on politics (though he declined to comment on the NBA’s current situation with China).

The NBA has itself weighed in on political issues. For instance, in opposing North Carolina’s Public Facilities Privacy and Security Act (the Bathroom Bill), the league went so far as to pull the scheduling of the 2017 All-Star game in Charlotte.

From that lens, Morey’s tweet about a political controversy seemed consistent with the league’s acceptance of political opinions. The obvious difference is how reaction to the tweet connected to the NBA’s business operations.

The NBA’s financial dealings with China could lead to legal disputes

The NBA has clearly eyed China as worthy of considerable investment and time. As I mentioned in a recent story, there are more people in China who watch NBA programming than there are people who reside in the United States. The NBA, in fact, is viewed as the “most popular” sports league in China. The league, which has offices in Beijing and Shanghai as well as offices in Hong Kong and Taipei, Taiwan, has entered into lucrative business partnerships with Chinese technology and media companies.

The NBA has reason to worry that these investments are jeopardized by the current controversy. This is true of the league’s $1.5 billion contract with Chinese tech giant Tencent, the NBA’s digital partner in China. The NBA’s contracts with Tencent are obviously private documents, but they likely include language that would authorize either side to exit the deal should certain conditions manifest. One possible condition is an action or omission by the NBA that Tencent interprets as a breach.

Whether Silver supporting Morey’s right to free speech qualifies as grounds for contractual breach would depend on the language in the contracts and business understandings between the league and Tencent. If Tencent tries to withdraw from its contractual obligations to the NBA, the company’s contracts with the NBA could become the source of potential litigation or arbitration.

It is often difficult for American companies to sue Chinese companies in the United States given uncertainty as to whether a civil judgment would be enforced in China, but a legal action is more practical when the Chinese company has an American branch. This is true of Tencent, which has offices in four U.S. cities. Arbitration or mediation (which is a non-binding dispute resolution process) are also possibilities depending on the wording of the contracts. Likewise, the parties could also simply settle any legal grievances out of court and out of formal dispute resolution.

As perhaps an early indication of the fallout and willingness of Chinese entities to hit pause on relations with the NBA, China’s CCTV Sports Channel and Tencent have announced they will suspend cooperation with the NBA. According to Tech Crunch, Vivo, a Chinese-based smartphone company that contracted to sponsor NBA games in Shanghai, is also (for now) stepping back from relations with the NBA.

In making its announcement, CCTV bluntly objected to Silver supporting Morey’s “free expression.” The company argued that freedom of speech does not include “speech that challenges national sovereignty and social stability.” Obviously, what’s considered free speech in the U.S. is different from what’s considered free speech in China.

At a minimum, these developments mean that Thursday’s Brooklyn Nets-Los Angeles Lakers preseason game in Shanghai will not be broadcast to Chinese fans, either by TV or streaming. No matter how much the NBA might downplay the cancelling of a local broadcast, it serves as a reputational and commercial loss to the league and its plans to attract more fans and investment.

CCTV’s statement also referenced that the state-owned company will “immediately investigate all cooperation and exchanges involving the NBA.” This “investigation” signals that CCTV is exploring how its relationship with the NBA could be reduced, if not terminated. It’s thus possible that CCTV’s actions could lead to a contractual dispute with the NBA.

NBA players and the National Basketball Players’ Association also have stakes in the outcome

The fallout of the NBA’s controversy could impact its players. This particularly the since players have a collectively bargained right to about half of the league’s “basketball related income” or BRI. BRI includes revenue from the sale and licensing of broadcast rights and intellectual property.

The details of BRI are crucial in collective bargaining between the NBA and the NBPA. This is in part because the annual salary cap for players’ salaries is impacted by BRI. Although details complicate, a higher BRI generally leads to a higher salary cap and higher player salaries. To the extent the growth of the NBA over the next several years was predicated on revenue from China, a loss of such revenue would probably impact players’ salaries.

Brand matters, too.

Potential contract disputes are worrisome for the NBA, but the risk of lasting damage to reputation is more of a worry.

To that point, the NBA is not only a sports league. It is also a brand. If the brand is significantly tarnished in the eyes of Chinese businesses and consumers, it could prove difficult and costly fort the NBA to remedy.

Should the NBA walk away from China?

In light of the controversy and its fallout, the league will need to reconsider its plans for operations in China. There are calls for the NBA to walk away from China. The basic argument is that China’s political system is too incompatible with Western values and the league ought to prioritize democratic norms over money. In a new story, my colleague Rohan Nadkarni persuasively argues, “the NBA Should No Longer Do Business With China.” Regardless of your viewpoint, it’s worth reading.

The NBA also doesn’t “need to” do business in China. The league is already doing quite well financially. There are other international markets with large populations and large economies that could be explored. With that in mind, the league is investing in India, which has 1.37 billion people (China has 1.43 billion) and the world’s fifth largest economy (China is second).

That said, it’s possible that the NBA’s current controversy in China will, like most controversies, subside over time. This may be the height of the storm, at least as viewed from the U.S. As the NBA’s regular season approaches, and as the news cycle shifts to some other controversy, the league’s situation in China will probably improve irrespective of any steps that league officials take. Whether that phenomenon also proves true in China is harder to predict, and it will be up to the league to make that determination.

Michael McCann is SI’s Legal Analyst. He is also an attorney and Director of the Sports and Entertainment Law Institute at the University of New Hampshire Franklin Pierce School of Law.