Can The NBA Sell The Clippers Out From Under The Sterlings?
At this point, most of America knows that Donald Sterling (1) owns the Los Angeles Clippers basketball team and (2) was recorded saying incredibly stupid, racist things about African-Americans in general and Magic Johnson in particular. TMZ posted the recorded conversation on Friday, April 25. Over the weekend, while the NBA continued its playoffs, there was a tidal wave of outrage among players, fans (linked by social media) and the press. By Tuesday, April 29, NBA Commissioner Adam Silver announced that (1) Donald Sterling was banned for life from the NBA and (2) he was asking the owners of the other 29 NBA teams to terminate Sterling's ownership of the Clippers. Sterling's estranged wife, Shelly Sterling, has announced that she will fight to keep her "co-ownership" of the Clippers.
Adam Silver did not solve the NBA's Donald Sterling problem with his April 29 announcement that he would seek to expel Sterling from the NBA, he made a choice of which Sterling problems would persist. Adam Silver decided that he would rather face the consequences of attempting to terminate the Sterling family than the possible meltdown of the league's relationships with its players, sponsors, media partners and fans that would arise from allowing the Sterling family to remain in control of the Clippers.
Does the NBA have the power to revoke the Membership of the Sterling Family from owning the Clippers? Short answer: Yes.
Could the Sterling Family fight the NBA in court? Short answer: Yes, but they are extremely unlikely to succeed.
THE NBA CAN TERMINATE THE "MEMBERSHIP" OF THE ENTIRE STERLING FAMILY
If Donald Sterling is found guilty by 3/4 vote of the NBA's 30 teams (meaning 22 out of the 30 teams), the Clippers will be taken and operated by the NBA until the team can be sold. The assumption that the Clippers would have to be disbanded if the NBA terminated the Membership of the Clippers is a mistake that has led some to inaccurately believe that Shelly Sterling could hold on to her ownership interest even if Donald Sterling is found guilty by the NBA Board of Governors.
The default position under the NBA Constitution is that if any Owner (meaning anyone who owns any portion of the team) is found guilty, the Membership (meaning the right to operate a franchise in the NBA) is terminated. There is a second discretionary procedure that allows (BUT DOES NOT REQUIRE) the NBA to terminate only the guilty Owner without terminating the Membership of the Team. There is a third provision that exempts termination if the guilty Owner both (i) owns less than 10% and (ii) does not have "effective control over" the Member. Because Sterling was in "effective control" of the Clippers, that exemption does not apply.
Specifically, under Article 13 of the NBA Constitution, if Donald Sterling is found guilty by 3/4 of the owners of having either "(a) willfully violate[d] any of the provisions of the Constitution and By-Laws, resolutions or agreements of the Association" or "(d) fail[ed] or refuse[d] to fulfill its contractual obligations to the Association, its Members, Players or any other third party in such a way to affect the Association or its Members adversely" then the termination procedures under Article 14 apply. Article 14(g) provides that if the Board of Governors (by a 3/4 vote) votes to sustain the charges, "the Membership of the guilty Member or the Member in which the guilty Owner has an interest shall automatically be terminated, unless, following a motion duly made and seconded, two-thirds (2/3) of all the Governors vote instead to terminate the ownership interest of the guilty Owner or to invoke the provisions of Article 15 [which provides for a fine]."
Under Article 14A of the NBA Constitution, if Termination is ordered, the Clippers would not cease to operate but rather would be operated by the NBA until the team could be sold. "Such Member and its assets, properties and operations shall be placed under the management and control of the Commissioner." The Commissioner has the power to:
1. Cause the Team to continue to play its games, 2. Collect all Team revenues, 3. Pay the Team's debts and obligations, and 4. As directed by the majority of the NBA Board of Governors, sell the Member for the benefit of the terminated Owner.
Bottom line: If the NBA votes by 3/4 that Donald Sterling is guilty, they would be able to revoke the Membership of the Sterling Family and sell the Clippers notwithstanding the "innocence" of Mrs. Sterling.
Could The Sterlings Fight The Termination In Court?
If the NBA votes to terminate the Sterlings' Membership, Donald and/or Shelly Sterling could start a litigation to attempt to overturn the termination. Shelly Sterling, and her attorney, have already publicly threatened that "we're ready to go to war if he have to." Donald Sterling is an attorney who has engaged in fierce court battles throughout his life. The cost of litigation, even it ran into the millions, pales in comparison to the value of the Clippers, which is estimated at over $1 billion.
The likelihood that the Sterling Family could succeed in litigation against the NBA is extremely slim. Because the NBA's procedures were agreed to long before this controversy arose, the NBA's decision to terminate would be considered the outcome of a private arbitration. The Federal Arbitration Act creates a strong presumption that a court must confirm the result of a private arbitration. That presumption prevails even if the Court believes that the underlying decision was wrong on the facts or the law. Under Section 10 of the FAA, there are only a few extreme circumstances where a court has the power to vacate an arbital award:
(1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
It is an open question whether an award can also be vacated if it was rendered in "manifest disregard of the law." But even if that standard applies, it allows for an award to be vacated only if the decision does not even arguably have a basis in the underlying agreement.
Given the threat of litigation and the high stakes involved, the NBA will take great care to make certain that its arbitration award cannot be successfully attacked on any of these grounds. My strong expectation is that the NBA would prevail in any litigation.