The NBA and the Spirits

I thought today we could review the best deal in NBA history and a deal that might never end.  We’re not talking about any sort of player transaction but the famed settlement agreement between the St. Louis Spirits and the NBA.  Most basketball fans knows generally about this deal, namely that the owners of the Spirits were able to obtain a portion of NBA television revenue in perpetuity in exchange for Spirits’ agreement to fold as a team.  This agreement has enabled the Spirits to collect large amounts of cash, as league revenues have continued to grow the last 30 years.  Though a settlement agreement exists, the dispute between the parties is not actually totally settled.  In fact, the Spirits are litigating with the NBA this very day, 33 years after settlement.  Let’s review the 1977 deal from to give fans a little more perspective on how this deal has worked and why it has continued to be an issue now, over 30 years later. 

In 1976, the NBA and various members of the ABA (New Jersey Nets, Denver Nuggets, Indiana Pacers, and San Antonio Spurs) were talking about a limited merger that would exclude the other ABA teams (Kentucky Colonels and the St. Louis Spirits).  St. Louis ended up threatening to sue the ABA teams and the NBA based on various theories.  The lawsuit was a double threat: it had some merit on its own terms and its presence complicated the NBA’s relationship with the players’ union, which had its own antitrust suit pending against the NBA.  It would have been impossible to resolve the union’s lawsuit without also resolving St. Louis’ suit.  In 1977, the settlements were finally reached of all disputes.  The union received free agency, Kentucky received a one-time $3.3 million buyout, and the Spirits negotiated a slightly different deal, $3 million up front plus a portion of the merging ABA teams television revenues.  

Based upon the allegations in the 2009 complaint, we get to see exactly how the revenue is calculated.  The Spirits new complaint quotes a provision of the deal that states that the Spirits get: “T.V. Revenues equal to the aggregate to one-seventh (1/7th) of four twenty-seconds (4/22nds) of the T.V. Revenue earned by the NBA commencing with the first day on which [the merging ABA teams] are entitled to share in T.V. revenues under [the agreement]…,[I]n the event there are in the future more than twenty-two (22) NBA teams, [the] Spirits shall be entitled to a proportionately smaller share of T.V. Revenues (e.g. twenty-four (24) teams = 1/7 x 4/24) provided however that the Spirits in no event and under no circumstances shall be entitled to or be paid less than 1/7th of 4/28th of the T.V. Revenues, except as the parties may otherwise agree to in writing.”  In case you’re wondering, the Spirits’ counsel calculated that in the 2009-10 NBA St. Louis is now entitled to 1/49th of television revenues.  According to this 2006 L.A. Times article, the Spirits initially made about $300,000 per year off of the deal in the late 1970s.  As the NBA grew, so did television revenues.  The Spirits made about $15 million per year in the 1990s and roughly $24 million per year since the new television contract was signed in 2002.  

As with any ongoing agreement between two adversarial parties, this agreements hasn’t been without hiccups.  In 1984, the NBA sued the Spirits of St. Louis in action to determine what amounts were actually due under the settlement agreement.  Other than the general nature of the case, we cannot find any documents that provide the exact details of the dispute.  Still, the new case was settled and things were relatively quiet (or litigation free at least) until this year, when the Spirits again sued the NBA, claiming that the NBA has refused to pay “visual media broadcast” revenues for NBA TV games and cable broadcasts that were generated outside of the geographical limits of the teams (particularly the international markets) and that the NBA refuses to allow the Spirits access to the books to determine if the NBA is holding back revenues.  The NBA just recently obtained a dismissal of the action on procedural grounds (i.e. that it should’ve been filed in Federal Court and not State Court) but it looks like the epic battle/relationship will continue in Federal Court (the Spirits have also appealed the procedural dismissal). 

Can this relationship ever end?  Assuming that the NBA continues to exist and thrive, it’ll be tough for the NBA to ever get out.  Just for fun, I thought I’d throw out a few possible options.  I realize that high powered attorneys and experts have contemplated this issue for over 30 years so we are unlikely to come up with an answer here and now.  Still, it’s no fun just to give up so here goes: 

-A buyout:  Like any contract you regret, the quickest exit is pay off.  Obviously, the NBA would have to pay a ton of up front money to convince the Spirits to give up a zero cost asset that has yielded a few hundred million dollars already.  As such, the NBA would have to pay serious cash to make the Spirits even think about this, so we doubt this is a viable option.

-Technology Change:  We don’t have the actual settlement agreement, so its impossible to determine exactly what its terms are.  We do know that the Spirits get a share of revenues in sale or license of visual media broadcasts.  In 1976 when the agreement was first contemplated, that was limited to television.  It is very possible that we could reach a day when the television becomes obsolete (or much less relevant) and games are broadcast mostly over the internet or some new medium.  Is the term “visual media broadcasts” expansive enough to cover such new mediums?  It sounds pretty broad but we don’t have the agreement.  At the very least, that’s a kernel of an idea for the NBA to play with.

-Self-Broadcast?:    Again, no settlement agreement has been reviewed but the agreement seems to cover the sale or license of broadcasts.  If the NBA only self-broadcast games, would that be an exception to “sale of license”?  It’s not clear without info but the Spirits’ complaint in this case seems to indicate that it wouldn’t.  The Spirits are seeking revenues for games that are currently broadcast on NBA-TV, which is owned by the NBA.  Assuming self-broadcast did constitute an exception, it would be hard for the NBA to give up network revenue for a risk like self-broadcast, though some degree of self-broadcast could at least defray some of the revenue lost to the agreement. 

In all cases, we’ll keep watching the Spirits/NBA dance.  That fact is, there is a good chance that someone could be talking about this agreement in the year 2109 with many of the same issues popping up.

4 comments for “The NBA and the Spirits

  1. penbeast0
    December 6, 2009 at 10:07 am

    All I can say is that while the deal has turned out to be ridiculously good for the Spirits, a team that didn’t last long or compete well while it did, at least it isn’t going to John Y. Brown.

    He folded the Kentucky Colonels, one of the best and most stable franchises in the ABA for a cash buyout and a promise to let him buy into an NBA team. In his defense, Chicago was holding up the whole deal so long as they didn’t get Artis Gilmore so we might have lost even the teams we got.

  2. Harlan Schreiber
    December 6, 2009 at 11:02 am

    Let me clarify…I definitely don’t begrudge the Spirits the cash, I just think it’s a crazy story and wonder if it’ll ever end.

  3. Malemute
    December 6, 2009 at 9:51 pm

    This deal is nuts. Why would the NBA agree to give a cut of revenues into perpetuity? It must have been obvious in the late ’70s that TV revenue would be an important part of their business model. Maybe the NBA can buy out the deal with the money a new owner pays for a new franchise.

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