Tuesday, June 18, 2013

Doc Rivers' Non-Compete Agreement

By the time you read this blog post, it's like to be outdated. Such is the fast-paced world of professional sports, and the insane coaching carousel we see every year (but particularly this year in the National Basketball Association).

This past week, the NBA world - which should be focusing on the Heat-Spurs final - has been distracted by the possibility of Doc Rivers leaving the Boston Celtics for the Los Angeles Clippers. The rub is that Rivers, the game's highest paid coach, has three years and $21 million remaining on his Celtics' agreement.

So how, and under what terms, can Rivers leave if he is bound by a current agreement? There are a few different angles to explore on this.

First, in the NBA, a standard coaching contract provides for a means by which teams can negotiate compensation to let coaches leave and jump ship from one team to another before the contract expires. In Rivers' case, his agreement is not standard. He has a separate clause that prohibits his employment as a head coach by another organization before the end of his contract term. The significance is that the Celtics' top brass simply could invoke the non-compete, rather than negotiate under the standard contract clause for suitable compensation to let him leave for another team. Obviously, this creates leverage for management, which is a by-product of the above-market compensation Rivers received a few years ago.

Second, the incentives in the coaching world strongly favor negotiated transactions to release coaches from their contracts. If a coach makes it publicly known that he's considering leaving, then recruiting (either via free-agency or - in the case of college coaches - from high school players) will suffer. And team chemistry may be shot. Therefore, a team - faced with a disgruntled coach and a looming PR disaster - needs to think about an appropriate business resolution, not enforcing agreements.

Third, the supply of potential competent coaches vastly exceeds the number of available openings. There's a new school of thought, based largely on statistics, which demonstrates that coaches don't influence game outcomes as previously thought. If that's the case, then owners and management can use coaches as mere assets on a balance sheet - to gain even some minimal compensation to waive a contract term and allow a coach to leave if another team genuinely wants that coach. In pro sports, this compensation usually takes the form of draft picks or actual players. In college, it's generally a buy-out of the contract by the hiring university. Economists and other experts likely will debate for years to come the intrinsic value of coaches, but everyone would agree that finding a replacement for most coaches generally is pretty easy.

Recall, too, that coaching obligations generally are in-term, not post-term, restraints. It is not, to my knowledge, illegal to sign a coach to a contract that contains a garden-variety post-termination restrictive covenant (although this may be an interesting question for any institution or franchise in California, Oklahoma, and North Dakota). But no one does it.

Why is that?

For starters, no team or university is likely to set a standard that makes it difficult to attract a top-flight coach. Even though economists may feel as though coaches' ability to influence outcomes is overstated, institutions always want to be viewed as an attractive destination. Put another way, an industry standard has developed that by and large discourages any organization from requiring a post-termination non-compete.

On a related point, coaches sign contracts that guarantee them compensation for a term of years. Most employees are at-will, meaning they can resign at any time and are perpetual free agents. An in-term non-compete for an employee like Rivers limits his ability to leave for another team, and the Boston Celtics have the exclusive right to his unique services for a period of years. Both sides get an obvious tangible benefit. This level playing field simply is not a paradigm most employees are familiar with.

The one high-profile post-termination non-compete exception I have seen in recent years involved Billy Donovan. Donovan, the current University of Florida basketball coach, agreed in principle to leave and join the Orlando Magic after winning two national titles with the Gators. He soon backed out of the deal to which he committed. As part of a settlement, the Magic released Donovan from his coaching contract and allowed him to return to UF. But Donovan agreed not to coach in the NBA for five years. Incidentally, that pact has now expired - and Donovan openly has ruminated over a potential return to the NBA.

Is anyone surprised?

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