Donald Sterling Sues The NBA: Like A Snake Swallowing Its Own Tail
Late Friday, Donald Sterling lashed out at the NBA in a billion dollar lawsuit, but within minutes it was clear that he had been checkmated by the NBA and his estranged wife, Shelly Sterling.
First, Donald Sterling (in his own name and on behalf of the Sterling Family Trust) sued the NBA for a billion dollars.
Second, Shelly Sterling (for herself and on behalf of the Sterling Family Trust) agreed to indemnify the NBA against Donald Sterling's suit.
Third, the NBA accepted the sale of the Clippers to Steve Ballmer, pending approval of the NBA Board of Governors (the other 29 owners), for $2 billion.
Finally, the NBA cancelled the June 3 hearing and discontinued its efforts to terminate the Sterlings' ownership of the Clippers.
Taken together, these moves mean that Sterling Family Trust is essentially suing itself. Donald Sterling's complaint is brought on behalf of the Sterling Family Trust, but he was removed as co-trustee when he failed a neurological examination earlier in May. Shelly Sterling, as the sole remaining trustee of the Sterling Family Trust, has agreed to absorb any damages or costs (including legal fees) as a result of Donald Sterling's suit. And the NBA has eliminated the basis for Donald Sterling's suit by discontinuing its efforts to terminate his ownership of the Clippers.
Below the fold, I review each of these steps.
DONALD STERLING'S LAWSUIT WAS A LONGSHOT FROM THE START
In the federal complaint that Donald Sterling filed on Friday, he alleged that the NBA had caused him and the Sterling Family Trust over a billion dollars in damage. The bedrock of the entire complaint was Sterling's allegation that the NBA was wrongfully terminating his ownership of the Los Angeles Clippers because the recording of Sterling's racist rant against blacks, Mexicans and Magic Johnson was illegally recorded without his knowledge. On that basis, Sterling alleged five causes of action against the NBA, Commissioner Adam Silver and 50 "John Does" to cover any NBA owner or employee that voted to expel him from the league.
Count one alleged that the NBA's termination of Sterling as an owner violated the California Constitution's right of privacy and California Penal Code Section 632 because it relied upon asecretly-made audio tape of Sterling.
This claim was doomed from the start because the NBA Constitution specifically authorizes the termination of an ownership group on a vote of 3/4 of the other owners. The NBA Constitution provides that "strict rules of evidence" do not apply to a termination hearing. The NBA Constitution further provides that such punishment must be enforced as an arbitration award in court, with no other legal action permitted.
Count two alleged that the NBA was liable for breach of contract for having imposed a $2.5 million fine on Sterling and banned him for life, because Sterling had not violated the NBA Constitution or any of his contractual obligations to the NBA. Sterling lashed out at some of the NBA's biggest personalities in complaining that he was being singled out despite similar misconduct by NBA star Kobe Bryant (calling a referee a "fucking faggot"), former NBA star and current Sacramento King part owner Shaquille O'Neal (mocking a disabled individual and, in a separate incident, speaking pidgin Chinese to mock Yao Ming) and current Orlando Magic owner Richard DeVos (donating money to anti-LGBT causes and making inflammatory statements about HIV and AIDS). This count demanded that all discipline be rescinded.
Like Count one, this count was doomed because the NBA Constitution specifically empowers the Commissioner to impose punishment as he sees fit, which is to be enforced as an arbitration award with no other legal action permitted. Even though it was a stretch for Commissioner Silver to impose a $2.5 million fine (because the specific clauses of the NBA constitution that Sterling violated allow only a fine of up to $1 million), no court would have reached the substance of the decision. The difference between a $1 million and $2.5 million fine is insignificant in the context of a lifetime ban and sale of the team for $2 billion.
Count three alleged that the NBA and its owners violated federal anti-trust laws by forcing the sale of the Clippers. According to Sterling, the "forced sale" lowered the price that theSterlings would receive for the team and impose additional tax liability and costs, resulting in damages of "at least $1 billion", which are to be trebled (3x) under federal anti-trust law.
The anti-trust claim was always Sterling's biggest threat, because of he possibility of treble damages. But the $2 billion price tag for the Clippers, almost 4x more than the previous record for purchase of an NBA franchise ($550 million for the Milwaukee Bucks in May 2014), rendered the claim that Sterling was damaged by the "forced sale" laughable.
Countfour alleged "conversation" which means wrongfully taking property away from an individual.
This claim had no chance because the NBA was no taking the team away from Sterling and holding it for itself, but rather requiring the sale of the team with the purchase price going to Sterling.
Count five alleged that the defendants breached their fiduciary duties to Donald Sterling by bringing charges against him and imposing unduly harsh discipline.
This was just a repackaging of Sterling's claims that the discipline imposed on him was unjust.
For all of these alleged harms, Sterling demanded at least $1 billion in damages (to be trebled under federal anti-trust law), an immediate halt to the termination proceedings against him, reversal of the $2.5 million fine and lifetime ban and re-appointment of Sterling's crony (Andy Roeser) as the CEO of the Clippers.
At the moment Sterling filed his claims, they were almost certainly an exercise in futility. But the NBA and Shelly Sterling quickly acted to swat down this Hail Mary pass (excuse the football metaphor in a basketball article).
SHELLY STERLING AND THE STERLING FAMILY TRUST AGREED TO INDEMNIFY THE NBA
Although Donald Sterling purported to bring his suit on behalf of the Sterling Family Trust (which owns the Clippers) in his capacity as co-trustee, he has been ousted from control of the Sterling Family Trust. According to Shelly Sterling and her attorneys at Greenberg Glusker, Donald Sterling was removed as co-trustee because he failed an neurological examination in May and has been removed on the basis of his "mental incapacity". The removal of Donald Sterling left Shelly Sterling as the sole trustee of the Sterling Family Trust, meaning that only she could act on its behalf.
Shelly Sterling issued complete indemnification to the NBA on behalf of herself and the Sterling Family Trust. So the Sterling Family Trust is essentially suing itself. It is liable for any damages that would be paid to . . . the Sterling Family Trust.
The indemnity not only protects the NBA from damages to be paid to Donald Sterling and the Sterling Family Trust, but also any legal fees that the NBA must pay to defend against Sterling's lawsuit. This indemnity deprives Donald Sterling of one of his favorite legal tactics, imposing exorbitant legal fees on both sides in the expectation that he had a greater willingness to pay massive bills than his opponent.
The indemnity also makes extremely likely that the federal court will make an immediate determination of whether Donald Sterling or Shelly Sterling properly controls the Sterling Family Trust. Because federal judges are constitutionally required to adjudicate only an "actual case or controversy," they routinely determine as a threshold matter whether the parties before them have "standing" to assert their claims. The absurdity of the Sterling Family Trust being responsible for any damages won by the Sterling Family Trust will not be tolerated by the court.
THE APPROVAL OF THE SALE OF THE CLIPPERS TO STEVE BALLMER FOR $2 BILLION IS A HUGE VICTORY FOR THE NBA AND SHELLY STERLING
Within two days of announcing the lifetime ban on Donald Sterling, Commissioner Adam Silver publicly declared that his preferred outcome was for the Sterling family to voluntarily sell the team before the NBA had to act to terminate their ownership. He could not have imagined at that moment that the team would be sold on that timetable for such an extraordinary sum. Earlier in 2014, Forbes estimated the current value of the Clippers to be $575 million, on revenue of $140 million. Just last month, the Milwaukee Bucks were sold for $550 million. The initial estimates of the sale price for the Clippers were between $550 - $700 million. When I suggested in a tweet to the Wall Street Journal's NBA reporter that the purchase price would be at least $800 million, I was dismissed. As late as last Monday, reports that the Clippers might be sold for $1.2 billion were seen as wildly optimistic. Every other NBA owner must be cheering the increased value of their franchises.
For Shelly Sterling, she has moved from the loser's column to one of the big winners in this affair. Even after taxes and splitting the proceeds with her husband, she is going to pocket more than $575 million that Forbes estimated the whole team to be worth. The team is being sold without the sort of due diligence investigation that ordinarily would accompany the sale of a multi-billion asset. Who knows what financial and tax hijinks would have been revealed if bidders had the time to review Donald Sterling's books for the last thirty years with a fine-toothed comb?
Shelly Sterling is not only winning financially, she Because she is so publicly fighting Donald Sterling (the most hated man in America according a poll released last week), she is reclaiming some of her dignity and public standing. In the four weeks since TMZ published the tapes, Shelly Sterling has moved from (1) little-known estranged wife to (2) Ruth Madoff of the West to (3) independent woman of wealth.
THE NBA WAS ABLE TO DISCONTINUE THE TERMINATION HEARING
The fundamental allegation of Donald Sterling's suit was that he was being wrongfully terminated by the NBA. But Donald Sterling's termination never will come to a vote. This deprives Sterling of the factual predicate for his lawsuit.
The discontinuation of the termination hearing also means that the NBA does not need to set the precedent that an owner can be terminated for private acts that later become public. Dallas Mavericks owner Mark Cuban has warned that voting to terminate Donald Sterling under these circumstances created a "very, very slippery slope" - even as Cuban held his own counsel about how he would eventually vote. While it seems extremely likely that Sterling would have been terminated on Tuesday if this agreement had not been reached, there will not be a final adjudication. Maybe it takes away one of the "very"s, so it is just a "very slippery slope."
BOTTOM LINE: I expect that the NBA will approve the sale of the Clippers to Steve Ballmer quickly and that the Federal Court will dismiss Sterling's suit on a motion to dismiss without discovery.