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After the Whistle Blows: Criminal Liability in Sports Law

By [Tuesday, March 25th, 2014]

Colorado Avalanche v Boston BruinsOn December 7, 2013, Shawn Thornton of the Boston Bruins sucker punched Brooks Orpik of the Pittsburgh PenguinsThe result is that the National Hockey League (NHL) gave Thornton a 15-game suspension for the hit. Will a prosecutor press charges?  Probably not.  The media fully covers when athletes get charged with crimes like domestic violence, rape and murder.  But they do not always pay attention to excessive violence in sports, because that is not a crime.  Excessive violence includes hits that are unrelated to the game and hits that are outside the scope of the game, and they should be crimes.

Athletes should be subject to the criminal justice system, not just for criminal behavior off the field (rape, murder, dog fighting); rather prosecutors should be able to bring charges against athletes who are criminally violent on the field.  Prosecutors should not be able to bring charges for any and every hit, as they should not interfere with the game.  Instead, they should have guidelines to follow in order to press these charges, such as the proposed Sports Violence Act of 1980.  The point of the Act was to protect athletes from excessive violence in the game, and provide prosecutors with guidelines to exercise their discretion in bringing criminal charges against game-time conduct, to ensure even-handed enforcement of the criminal laws.  Without these guidelines, prosecutors who press charges for game-time conduct might be criticized for interfering with the game or the leagues’ own discipline.

But the Act never passed, and the result is an even greater disparity in treatment of game-time versus off-field acts of aggression.  Currently, an otherwise criminal act in hockey results in a mere 2- or 5-minute penalty, while athletes who commit similar acts outside the game risk convicted of a crime and incarceration.  For example, former footballer, Alonzo Spellman, served 1 year in prison for simple assault when a similar act on the field would have been met with at most a flag and a fine.  Former baseball player, Milton Bradley spent almost 3 years in prison for assault with a deadly weapon, when stabbing someone with his spikes during a game would at most have resulted in him being ejected.

Aside from the lack of guidelines for bringing charges against athletes, another problem with applying criminal law to sports is that athletes consent to the expected behavior in the game and assume the risks that are inherent in the game they are playing.  However, they should not be expected to assume the risk and consent to hits and injuries that are not inherent in the game.  When an athlete acts beyond the scope of the game, whether it is swinging a hockey stick at a player’s head, tackling someone after the play is over or tackling someone who is totally separate from the play, that athletes should be open to criminal liability.

Athletes are often considered role models for our youth.  In fact, Kadence Otto, in an article from the Journal of Legal Aspects of Sport, writes that “[s]port sociologists have noted that sport is a microcosm of society; namely, the behavior exhibited by athletes is reflective of the behavior exhibited by those in society in general.” People look up to athletes as people they would like to emulate, so when athletes commit any crimes, on-field or off-field, they should be punished, as anyone else is, to show that this is not proper behavior.  People use sports to help them decide how to treat others, how to conduct themselves, and even when illegal conduct is okay if it gains them undue advantages.  For some reason though, we ignore the criminality of something when it happens on the field.  While under the protection of their uniforms, we pay no mind to athletes’ otherwise criminal acts.  It then becomes okay for a person to act beyond the scope of the rules of the game as long as they are within the confines of the game.  Jeffrey Standen in Taking Sports Seriously: Law and Sports in Contemporary American Culture, notes that “The philosophy behind criminal law is based on society’s need to be free from harmful conduct.”  While “society” is not usually in harms direct way during a sporting event, one could argue it is indirectly in harm when children look up to their role models.  Society can also be directly harmed when on-field violence escalates, and makes its way into the stands, especially in basketball, where brawls have broken out.

We should not expect athletes to act like people they are not just because they are role models.  The role they are modeling, though, is professional athlete.  According to Standen, “Athletes display the athletic virtues:  diligence, perseverance, the value of training, fair play and sportsmanship, grace under pressure, and the pursuit of excellence.  The best of our athletes exhibit these virtues abundantly, in full public display.”  We should, however, expect them to be treated the same way as everyone else.  Just as anyone else who commits a crime at work should be charged with that crime, so should athletes.  Says Standen, “We can’t fairly ask our sports stars to be especially kind or honest, but we can ask them to exhibit good sportsmanship and a commitment to fair play.”  When they fail, we should be able to fairly expect them to pay for their actions, just as the people looking up to them have to do.

Should NFL Players Push Back Against League’s Social Media Rules?

By [Wednesday, December 11th, 2013]

BY NEIL M. WILLNER, NYLS ’14

Since the beginning of social media, NFL athletes have found a way to get in trouble.  Whether it’s Shady McCoy tweeting about his baby-mama-drama, or Chad Ochocinco (or Johnson, or Ochocinco-Johnson?) tweeting from the field, athletes cannot seem to figure out what is appropriate.  The NFL fines athletes tens of thousands of dollars in an effort to deter behavior “detrimental to the integrity of and public confidence in the National Football League.” But do athletes have any legal recourse against league rules restricting their social media activity? The National Labor Relations Board (NLRB) might answer in the affirmative if leagues fine athletes for posting comments about working conditions or wages.

chadochocincoappologizetwitterSince 2010, the NLRB has been policing employers’ social media policies to ensure its compliance with Section 7 of the National Labor Relations Action (NLRA). Under Section 7 of the NLRA, employees have the right to “self-organize, to form, join or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.”  Employers run afoul of Section 7 if they: (1) punish an employee for participating in a protected activity, or (2) maintain a social media policy restricting an employee’s Section 7 rights. Protected activity includes criticizing your employer on Facebook.  Similarly, social media policies that illegally restrict an employee’s Section 7 rights include rules “prohibiting employees from electronically posting statements that damage the company…or damage any person’s reputation.” In other words, the NLRB interprets Section 7 to extend to employees’ rights to engage with and disparage their employers on social media.

Missing from the NLRB’s social media decisions, however,  is any assessment of major sports league  discipline of players’ social media transgressions. Clearly, the NLRA does not protect every Facebook post or Tweet; the statute protects only labor organizing activity that is concerted, i.e., activity on behalf of all employees to improve working conditions. On what seems like a daily basis, athletes are running afoul of their respective leagues’ social media policies.  Granted, some infractions are not protected under Section 7 because they don’t implicate labor organizing or concerted activity, while other tweets defy all bounds of human decency and equally don’t deserve protection.

But other athletes, like Antonio Cromartie, tweet about their employment.  In 2009, when Cromartie played in San Diego, the Chargers fined him for a tweet complaining about the quality of food at training camp. Via Twitter, Cromartie said “Man we have 2 have the most nasty food of any team.  Damn can we upgrade 4 str8 years the same dish maybe that’s y we can’t w[in] the SB we need.” Although Cromartie never filed a complaint, he could have argued that he was punished for engaging in protected Section 7 activity because his tweet criticized a working condition – meals at training camp.  If Cromartie’s comments represented the general sentiment of his teammates and were not made solely on his own behalf, his activity would be concerted. Thus, his activity could be considered concerted activity because he sought to improve working conditions – better food at training camp.

Similarly, in the beginning of the 2012 NFL season, after replacement refs made a bad call and blew the game for the Green Bay Packers, many players, including T.J. Lang lashed out on Twitter, criticizing the NFL and replacement refs.     Even though the NFL ultimately decided to forgo fining the Packers, T.J. Lang tweeted about working conditions, specifically, the inexperienced replacement refs. His activity was most likely protected because he expressed the general sentiment of his teammates.  Thus, if the NFL did fine T.J. Lang, he would be able to file a complaint with the NLRB about the NFL restricting his protected Section 7 activity.

vick facebooThus, even though the NFL’s Personal Conduct Policy requires players to “avoid conduct detrimental to the integrity of and public confidence in the National Football League,” arguably the policy is unenforceable to the extent  players interpret it to prohibit Section 7 activities. The test determining whether rules of employment restrict Section 7 rights was articulated by the NLRB in Lutheran Heritage Village:  “whether the rule would reasonably tend to chill employees in the exercise of their Section 7 rights…  If the rule explicitly restricts Section 7 rights, it is unlawful.  If it does not, the violation is dependent upon a showing of one of the following: (1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights.”

In other words, even if a social media policy does not explicitly restrict Section 7 rights, the NLRB can find it unlawful if employees could reasonably construe the language to prohibit Section 7 activity.  For example, in Karl Knauz Motors, Inc. d/b/a Knauz BMW and Robert Becker, the NLRB held part of a dealership’s employment policy violated Section 7.  The unlawful policy stated: “Courtesy is the responsibility of every employee.  Everyone is expected to be courteous, police and friendly to our customers, vendors and suppliers, as well as to their fellow employees.  No one should be disrespectful or use profanity or any other language which injures the image or reputation of the Dealership.”  The Board found the policy unlawful because a reasonable employee could construe it as prohibiting Section 7 activity, such as discussing working conditions.

The exceedingly broad application of the Lutheran Heritage Village test should worry many employers, including the NFL.  Even if employee policies don’t facially restrict Section 7 rights, and even if policies are designed to promote workplace courtesy, they can still be unlawful.

The NFL’s social media policy prohibits players, coaches, and other personnel from using social networking sites on game day, 90 minutes before kickoff until after the “post-game locker room is open to the media and players have first fulfilled their obligation to be available to the news media who are at the game.” Because the policy prohibits any social media activity  during that time frame,  a reasonable employee (e.g., a “reasonable” player) could construe the policy as stopping him from complaining about employment-related conditions, like the referees.  If, for example, T.J. Lang tweeted about the referees before fulfilling his post-game duties, the NFL could have levied a fine under their social media policy. If Lang fought the fine, he could question the lawfulness of the NFL’s social media policy.  Just as in Karl Knauz Motors, Inc., employees could construe the NFL’s policy as restricting their Section 7 rights.

Granted, an employer has an interest in controlling their employees’ time during working hours and can thus restrict social media use in the office.  But, the NFL is not a typical “office,” and what exactly is the duration of the players’ workday – 90 minutes before the game through all post-game media obligations? Or, strictly on-field activity? What about practice?  The NFL’s policy does not prohibit tweeting 90 minutes before practice, nor does it prohibit tweeting during practice.  Aren’t daily practices just as much part of an athlete’s job as the game itself?  (Allen Iverson need not answer).  Because the athletes do not have standard working hours, any blanket ban on social media activity, like the NFL’s policy might reasonably be interpreted to restrict athletes’ Section 7 rights.

Thus, take note the next time the NFL levies a fine for a social media infraction.  If the player is engaging in concerted labor activity, he just may be protected.

The Aaron Hernandez-Patriots Contract Dispute: Waived, Voided, and Branded a Criminal

By [Tuesday, December 3rd, 2013]

aaron hernandezBY MICHELLE TORRES, NYLS ’14

In August of 2012 the New England Patriots negotiated a handsome five-year $40 million contract extension with the tight end Aaron Hernandez to play through the 2018 season. Fast-forward and both parties are unexpectedly in a dispute. The breakup began shortly after the June 2013 arrest of Hernandez for the murder of Odin Lloyd. The Patriots waived the tight end within a half hour of the arrest.

There is no dispute that the Patriots were entitled to use the NFL waiver system, described below, as a form of contractual relief from employing the indicted criminal. However, the Patriots announced they would void all future payments after examining their legal rights under the NFL collective bargaining agreement (CBA). The NFL Players Association (NFLPA) disagrees with the team’s decision to void such payments and filed grievances to make the Pats cough up the remaining amounts. The Patriots are denying payment on the basis that Hernandez forfeited future guarantees when he engaged in conduct detrimental to the best interest of the league. Hernandez will contend he is contractually entitled to the guaranteed money, and the contract lacked forfeiture language with respect to these amounts. Furthermore, if the Pats’ goal was to recover past payments or block future ones, they shouldn’t have waived Hernandez, but kept him under contract. Hernandez pled “not guilty” to six charges, including murder and gun possession charges and is being held without bail. He is due back in court on the unlucky Friday, the 13th of December.

The Patriots legally waived  Hernandez from employment under CBA Article 29’s procedure on waivers of player contracts.  The waiver is a labor-management practice that gives other clubs the opportunity to claim a waived player and his contract from the releasing team. A player can be waived for any reason and neither the player nor the new club suffer penalty or require compensation from the releasing team. However, if the player is unclaimed through the waiver system then he becomes a free agent. The releasing team is relieved from continuing employment and paying unguaranteed salaries to the free agent and may have to make the remaining (unpaid) guaranteed payments under the contract.  According to the CBA, Hernandez’s contract was subject to waiver because he is shy of a four-year tenure within the league. It came to no surprise when Hernandez cleared the waiver system, going unclaimed by the other 31 NFL teams and becoming a free agent. The waiver gave the Patriots the right to refuse continuation of employment and the right to refuse payment of unguaranteed salaries. But, the Patriots remain on the hook for payment of guaranteed money, unless they can cite to specific clauses in the contract and/or the CBA that justifies  doing otherwise.

Payment of guaranteed money is subject to the CBA, the NFL Standard Player Contract, and player-specific addendums. The standard player contract is a collectively-bargained contract that, other than yearly base salaries, contains structured and unalterable terms applicable to every player. In addition, each contract contains an addendum negotiated between the player’s agent and the team, which  covers guaranteed money, bonuses, incentives, and forfeiture. Base salary is money the player earns for playing during the season and does not require actual participation in a game. A workout bonus is earned for participating in a negotiated percentage of off-season workouts. A signing bonus is earned for signing with the team. It is typically paid in one lump sum to the player, but for salary cap purposes, teams prorate the signing bonus over the life of the contract. If a player is cut, the remaining portion of the signing bonus accelerates to that year. Guaranteed portions of the base salary, workout bonus, and signing bonus are protected from skill, injury, and cap terminations under the standard player contract. In other words, if Hernandez’s skill level decreased, if he suffered serious injury, or if the Patriots simply needed salary cap space, they could waive him but would still have to remit all guaranteed payments.

With respect to waivers for any other reason, the CBA requires the parties to negotiate the “Voiding of Guarantees”–this contractual forfeiture language in the addendum dictates guarantee obligations.  NFL contracts usually contain “failure to perform,” “failure to practice,” and “failure to report” clauses. The practical effect of these clauses protects teams from player suspensions or other legal woes, giving the team the right to void guaranteed payment under these circumstances. Ian Rapoport of the NFL Network reports that Hernandez’s contract lacks language that forfeits guaranteed base salary and signing bonuses in the event of the player’s default. The only forfeiture clause in Hernandez’s contract   apparently covers just his workout bonuses.  Arguably, this means Hernandez may be entitled to guaranteed payments even if he’s incarcerated.

Accordingly, the NFLPA dutifully filed grievances on behalf of Hernandez seeking payment of:

  1. $1.323 million in guaranteed 2013 salary;
  2. $1.137 million in guaranteed 2014 salary;
  3. $82,000 for guaranteed 2013 workout bonus;
  4. $500,000 for guaranteed 2014 workout bonus; and
  5. $3.25 million installment from his signing bonus.

The NFLPA believes the team wrongfully voided the portion of Hernandez’s 2013 salary that became guaranteed and due on March 17, 2013, months before police found Lloyd’s body near Hernandez’s home. The 2014 salary, although due after Hernandez’s arrest, is guaranteed without forfeiture language. Henandez earned the 2013 workout bonus when he successfully completed at least 90 percent of the offseason workouts from April to June, 2013. The 2014 workout bonus is guaranteed, and although subject to forfeiture per the contract, the Patriots waived him before he could breach the contract in the 2014 year. Lastly, Hernandez argues he earned the deferred signing bonus the second he signed the extension.

The Patriots nonetheless assert that the CBA gives them the right to void Hernandez’s guaranteed payments.  A Pats executive told Ben Violin of the Boston Globe that the contract “was guaranteed for skill and injury. It wasn’t guaranteed for personal conduct that cast the club in a negative light. We know the CBA. We are well within our rights.” In other words, the Pats believe the guarantees disappear because they cut Hernandez under Paragraph 11 of the Standard Player Contract, which allows termination when the player “has engaged in personal conduct reasonably judged by Club to adversely affect or reflect on Club, then Club may terminate this contract.”

Hernandez’s grievances raise several novel issues. First, when a player’s contract omits forfeiture language for guaranteed payments, does conduct-based termination nonetheless allow the team to void the guarantees, and if so, which ones? Section 9 of the CBA on “Forfeiture of Salary” expressly allows teams to void contracts and recoup bonus money in the case where a player commits a “forfeitable breach” due to incarceration. However, the Patriots waived Hernandez before his incarceration caused him to miss any football-related activities. Had Hernandez been under contract and unable to play because he was in jail, or suspended by the League, the Pats could have easily recouped the previously paid bonus money and voided any remaining payments. Although it is understandable that the Patriots wanted to distance themselves from Hernandez, their disregard of CBA procedure may well have financial consequences.

It’s also important to note that Section 9 is new to the 2011 CBA, in  recognition of the prior CBA’s failure to adequately protect teams from paying incarcerated players. The Michael Vick and Plaxico Burress incidents paved the way for this development. The  Hernandez situation may influence the League to seek further protection under the CBA when a player is waived for an arrest relating to personal conduct reasonably judged by Club to adversely affect or reflect on Club. The NFLPA should also seek clarification as to how the League’s “conduct detrimental” disciplinary standard interacts with CBA conduct provisions.

The Pats may also find grounds to forfeit and recoup bonus money in yet another provision in Hernandez’s contract. The contract contained a representation that Hernandez knew of no then-existing circumstances that would prevent his continuing availability throughout the contract. He is now being investigated for committing or participating in a double murder in July 2012, before he signed the contract. If Hernandez was involved in the July 2012 murder of Danny Abreu and Safiro Furtado, then he made a misrepresentation and breached the contract. The Patriots’ obligations with respect to the signing bonus may have to await a determination of Hernandez’s role, if any, in the double murder.

While some question the NFLPA’s advocacy on behalf of Hernandez,  the NFLPA said in a statement to USA TODAY Sports, “On behalf of all players, it is our responsibility to protect the rights in the collective bargaining agreement. We are not tone-deaf to what the allegations are in this case, but for the benefit of all players, there are important precedents here we must protect.” The NFLPA must pursue these grievances for players regardless of the accusations, in order to promote player trust and confidence in the union.  Meanwhile the NFLPA understands it faces a volume of criticisms for attempting to secure millions of dollars for an accused murderer. According to analyst Samer Ismail, the Hernandez drama may encourage the NFLPA to “lead teams to take harder stances in future contract negotiations with players regarding legal issues. For example, a ruling in Hernandez’s favor could easily lead to less guaranteed money for such players and more salary assigned to roster bonuses per game.”

And what about this murder rap? The details are long and complicated. Hernandez was indicted in August 2013 by a grand jury for the murder of Odin Lloyd. The prosecution’s biggest hurdle is the lack of a star witness and murder weapon. From the NFL’s perspective, it may be well-served by continued incarceration of Hernandez after all the negative media buzz involving the fallen star. Multiple murder charges, gun trafficking operations with other NFL players, and consistent drug use are just a few reasons Hernandez’s conduct may be detrimental to the best interest of football.

The NFL announced in a statement that if Hernandez “enters into a player contract prior to the resolution of the charges pending against him, the contract will not be approved or take effect until Commissioner Roger Goodell holds a hearing. The purpose of the hearing would be to determine whether Hernandez should be suspended or face other action prior to the charges being resolved.” Considering the severity of the charges piling up against Hernandez, any NFL suspension will likely be of the permanent variety. Even if Hernandez is found not guilty of all of charged offenses, and those on his legal backburner, the NFL response could be similar to the $250,000 fine imposed on Ray Lewis. Lewis also faced murder charges, and ultimately pled guilty to a misdemeanor for obstruction of justice. The NFL’s cited the negative stereotype of the admitted conduct as the basis for the fine.

Legal experts in the eye-opening Rolling Stone article on Aaron Hernandez assert, “In these cases, juries think that reasonable doubt means no doubt at all.”  If Hernandez is acquitted, the Patriots may still try to deny him millions of dollars, but the NFL can’t deny an innocent man a jersey.

Street Drugs in Sports: The NFL’s Double Standard

By [Thursday, November 21st, 2013]

BY JOSH SEIDMAN ’14

Drug use by professional athletes has been a controversial issue that has long captured the attention of the American public. More recently, the media’s widespread coverage of the use of performance enhancing drugs (PEDs) has led many to question the integrity of professional sports. This transformation has given rise to numerous public policy questions, concerns, and debates. The professional sports leagues have fought vigorously to end player use of PEDs through drug education and testing programs, while Congress has introduced legislation designed to set minimum steroid-testing rules and penalties, such as the Drug Free Sports Act and the Clean Sports Act. Considering the level of scrutiny regarding the use of PEDs, surprisingly little has been discussed about the appropriate level of testing on players for use of recreational drugs. Should professional athletes be subject to the same testing procedures and penalties for both PEDs and recreational “street” drugs? Testing for PEDs is accepted to ensure fair competition, but what justification exists to test athletes for recreational drugs?

NFL drugs useEvery professional sports league has a plan to evaluate and monitor drug usage for its players, including both PEDs and recreational drugs. These systems are developed exclusively through collective bargaining or consent in an individual player contract, and progressively punish drug usage in a step-by-step program, according to the amount of repeat offenses. The National Football League (NFL) set the standard in the U.S. when it began testing for steroid use during the 1987 season, and began issuing suspensions during the 1989 season, nearly two decades ahead of Major League Baseball. According to the NFL, it collects over 14,000 tests every year, more than any other professional sports league. Yet, despite setting the toughest standards for PEDs in American professional sports, with year-round random testing, it is fairly easy to beat the NFL test for recreational drugs as a player.

For players who are not in the substance-abuse program and who don’t agree to unannounced testing in their NFL Player Contract, testing (for cocaine, marijuana, PCP, MDMA, etc.) happens just once a year — between April 20 and August 9 during the preseason. After that test, the player isn’t tested again until the next year. That means, once a player has submitted to his annual test for recreational drugs, he can use them with impunity, as long as he does not engage in behavior that would place him in the substance-abuse program, such as being arrested for possession. The first positive test for a banned recreational substance results in counseling and treatment, not a suspension; only after multiple violations is a player suspended. In contrast, testing for PEDs happens on a random basis throughout the year, with one confirmed positive resulting in a four-game suspension. How foolish does a player need to be – or how addicted to drugs – to fail a test when he knows it is coming? Telegraphing when tests will occur undermines the effectiveness of testing and sends the wrong message to players – that they can use recreational drugs with minimal risk of league punishment.

One need only look at the many examples of the consequences of recreational drug use by athletes to understand why it is imperative to have the same level of scrutiny for both recreational drugs and PEDs. In December 2011, Chicago Bears wide-receiver Sam Hurd plead guilty to felony charges for intent to distribute cocaine, allegedly having sold drugs to dozens of NFL players. At the time of Hurd’s arrest, not a single player had recently failed a recreational test. If the charges brought against Hurd were true, players were using illicit drugs – stimulants, even, and potentially during the season – right under the NFL’s nose. As some of the most celebrated public figures in American culture, NFL players have an implied duty to serve as role models to the community at large. Not unlike learning a player has been gaining an unfair advantage from using, say, steroids, any situation in which players are engaging in the use or sale of illegal substances for recreation – within or outside of the season – would be a public relations nightmare for their team, as well as the NFL. To repair damage caused to the league’s image by players like Sam Hurd and prevent future similar incidents, the NFL needs to impose more stringent standards to deter recreational drug use, as it has with PEDs.

More recently, New England Patriots tight-end, Aaron Hernandez, was arrested on murder and gun charges. Rolling Stone subsequently ran a story claiming that, leading up to the time of his arrest, Hernandez had been using PCP, a dissociative drug that allegedly left him so paranoid, he always carried a gun. How could such flagrant, illegal behavior go unnoticed, especially considering that Hernandez had a previously documented history of substance abuse? Players that enter the NFL with a confirmed history of dependency are placed into the NFL’s substance abuseprogram. While in the program, that player can be randomly tested at any given point throughout the year, regardless of where they are. Hernandez slipped through the cracks because he passed his drug test at the NFL combine, and thus was never placed in the NFL’s substance abuse program. If the NFL had yearlong, random testing for recreational substances, it is possible that Hernandez may have received help before it was too late. Accordingly, the NFL needs to raise the standard for recreational drug testing by proactively monitoring substance abuse in order to protect player health and the safety of others.

With prescription drug abuse on the rise, it is important to note that some recreationally used drugs also have the potential to enhance players’ performance. The use of Adderall – a stimulant best known for treating ADHD – has been a hot button issue in recent years, with 14 players blaming PED suspensions on Adderall or similar substances. Now, the NFL and NFL Players Association (NFLPA) are discussing a proposal that would make a positive test result a substance abuseviolation, as opposed to a violation for PEDs. That means a player would be placed in a treatment program after the first offense, with suspensions and more severe punishment for additional violations. However, some addiction specialists and psychiatrists believe that Adderall can give a player a tangible edge by making them feel calmer, more alert, and providing a heightened sense of concentration within a game that is, so to speak, slowed down. In addition to any competitive edge the drug lends, it comes with significant health risks; as a Schedule II narcotic, it is highly addictive, and an overdose could result in a drug-induced psychosis or cardiac arrest. The NFLPA’s proposal, if accepted, might provide players with greater leeway to use and abuse Adderall, since recreational drugs are only tested for during a limited window of time. In doing so, players may simultaneously put their health at risk, and threaten fair competition. To account for substances that can be used both recreationally as well as to enhance performance, the NFL needs uniform testing procedures for all substances and their use.

As a result, the NFL finds itself in a position wrought with hypocrisy as it takes extreme measures to stop players from using PEDs – so called “cheaters” – but imposes only minimal testing requirements and far less punitive consequences for recreational drug use. One need only compare the numbers: In 2012, thirty-five players tested positively for PEDs, while only nineteen violated the substance abuse policy. Yet the previous and subsequent years boasted perfect examples (Hurd and Hernandez) of the growing problem of recreational drug use within the league. The impetus for this disparity is presumably that the NFL considers steroids a competitive issue, and recreational drugs a medical one. This explains why first-time offenders of the NFL recreational drug policy are only met with counseling and treatment, not suspensions. Regardless, the professed rationales for drug testing programs – fair competition, public confidence in games, the high visibility of players as role models, and the health and safety of athletes and those around them – are extant, and should apply to both the use of both PEDs and recreational street drugs. If the league’s testing programs are to have any merit, the consequences for drug use must be severe and across the board.

In the future, more frequent and less predictable testing may uncover better information on players who use recreational street drugs. The league may also encourage teams to engage in more intense scrutiny – background checks, for example – of players before signing them. If the NFL desires to provide what is considered the gold standard for fair competition in the arena of professional sports, it needs to adopt a harsher, if not zero-tolerance policy against the use of banned substances. Because changes to the NFL drug testing policy must be collectively bargained for, in addition to considering federal and state laws pertaining to illegal substances, the league would undoubtedly face NFLPA opposition to efforts to create a more clean, and thus fair, playing environment. However, the first step is for the NFL to acknowledge the disparity in their drug testing policy, and that recreational drugs are, or have the potential to be, equally harmful to the players, the teams, the league, and, subsequently, the public at large. Ultimately, though, the NFL needs to increase the level of scrutiny into player use of recreational substances. The implementation of identical testing procedures and penalties for both recreational drugs and PEDs would be an initial step in the right direction.

Athlete IPOs – Not Likely to Show You the Money

By [Tuesday, November 19th, 2013]

Arian FosterImagine a scenario where you have a couple of extra dollars, you’d like to invest them, and I’m your stock broker. Fear aside, you call me to discuss your options. I ask if you’re interested in the following:

  • Mutual funds? Sorry, didn’t mean to put you to sleep.
  • Savings Bonds? Cool until the United States credit rating is downgraded – again.
  • What about a professional athlete? Good joke, but that’s not even possible.

It wasn’t – until the creation of Fantex, Inc. According to its website, Fantex “signs a contract with an athlete to acquire a minority interest in their brand and builds a plan with a goal to increase its value, leveraging Fantex, Inc.’s marketing expertise.” The company appears to be trying to publicly replicate the “investment” opportunity that private investors have had for years in sports such as golf, horse racing and boxing.

The company’s initial public offering will be for Houston Texans running back Arian Foster. Fantex is paying Foster $10 million for a 20 percent stake in his future income, including contracts, endorsements and other related off the field business revenue. The IPO will offer 1,055,000 shares of “Fantex Series Arian Foster Convertible Trading Stock” for only $10 per share. Unlike many esoteric investments available only to high-net worth individuals, Fantex offers its stock to any United States resident who is 18 years or older. The company will begin taking reservations in the next two weeks and could begin selling shares as early as next month. Recently, Fantex reached a second deal with San Francisco 49ers tight end Vernon Davis.

DavisOn its face, this seems to be the opportunity fans have been waiting for. In a way, it brings fantasy sports to life. But there are significant risks involved. Due to the JOBS Act, companies under the “emerging growth” umbrella now have more regulatory wiggle room to attract investors. Accordingly, a company like Fantex can market itself to investors more broadly and with less underlying information than the SEC previously required. This is how Fantex can advertise to investors, with little context, its ability to “buy and sell stock linked to the value and performance of a pro athlete brand.” Sounds amazing, but what is an investor actually purchasing?

The investor is purchasing what is known as a “tracking stock,” which will theoretically mirror the performance of an athlete’s brand. But in reality, prospective investors are actually buying a convertible stake in Fantex Brokerage Services. Fantex is a money-losing firm that is just 12 months old with no experience in this investment market. In its prospectus filed with the SEC, Fantex concedes, “This offering is highly speculative and the securities involve a high degree of risk.” What’s more, the company admits “investing in our Fantex Series … should be considered only by persons who can afford the loss of their entire investment.”

While there is performance risk inherent in every investment, the risk associated with Fantex is heightened. Since investors are not buying equity in Arian Foster or Vernon Davis, they have no say in how the players choose to manage their career. Rather, investors are buying shares of Fantex the company, and in doing so are relinquishing traditional shareholder rights. Comparatively, shareholders in the traditional private equity context retain the right to determine if/when shares are converted. Under the Fantex model however, Fantex controls whether the investors’ interests in Foster/Davis’ brand income will turn into company common stock. Unsophisticated investors, the exact ones Fantex targets, probably won’t take the time to read Fantex’s 150-page prospectus and likely won’t know they’ve handed over all voting rights.

Similarly, Fantex is under no obligation to pass Foster/Davis’ earnings on to the shareholders in the form of dividends. Fantex’s only duty is to itself; the company can “reattribute assets, liabilities, revenues, and cash flows” as it sees fit. Investors will likely be left out to dry even when Fantex receives 20% of Foster’s earnings. And about those earnings – while investing an athlete’s brand sounds fun, pro athletes aren’t known for making the best business decisions. Before buying into Fantex, investors really need to be asking themselves if they are willing to bet on the business judgment of Arian Foster/Vernon Davis by way of a novice brokerage company.

Further, Fantex stock can only be traded on its proprietary exchange, which means a brokerage free will be attached to any transaction and investors will not have the opportunity to trade and sell on the open market. To quote Reuters, “This investment, then, is basically the worst of all possible worlds: if Foster fails, it fails, and if Fantex fails, it also fails. And even if they both do quite well, you’ll only be able to profit on your investment insofar as a completely separate business – the Fantex stock exchange – actually works.”

Possibly the biggest concern is the more than likely possibility that the company can go bust. That’s what happened to Protrade, a company with a nearly identical concept several years ago. While Yahoo eventually bought Protrade, it did so only after Protrade moved away from investing in athletes and morphed into a developer of sports-related cell phone apps. Overall, the risk of investing with Fantex is so high that New York Magazine discussed it at length in a feature piece titled, “The Age of Bullsh*t Investing is Back!

Up until now, the coverage of Fantex has predominantly focused on the fan’s investment, but that’s not the only issue. What about the athlete? In exchange for a percentage of their brand’s future income in perpetuity, the athlete agrees to accept an upfront payment. Under this model, athletes, likely in their mid-to-late twenties, must project their long-term earning potential and conclude their brand will not generate more money than they’ve agreed to give away. Using Foster as an example, the “break even” point is $50 million – 20% of $50 million would equal the $10 million upfront payment. If his brand generates more than $50 million over its life, Foster would then be giving away 20% of his money without receiving any benefit in exchange. This is immensely problematic as Fantex’s business model is premised on exactly the opposite occurring. Since Fantex wants the investor to focus on the athlete’s brand rather than their on-field performance, it is clearly focused on what the athlete does after they retire. The “How It Works” section of their website confirms this.

It’s also worth exploring whether the athlete truly knows what’s required of them upon entering into this deal. By agreeing to a deal with Fantex, the athlete is legally bound to produce quarterly earnings reports detailing the precise amount of money his/her brand generated. Additionally, checks for 20% of those earnings must be written to Fantex. If that’s not enough, the athlete and his advisors must now become familiar with federal insider trading laws. If an athlete or a member of his financial team discusses issues that might affect his earnings, the athlete runs the risk of violating federal securities laws.

Teams and leagues will surely be wary as well, knowing Fantex plans to expand beyond football players and many questions remain. What happens if an investor “shorts” an athlete’s stock, betting against their success? If an athlete buys his/her own stock, is that any different than Pete Rose betting on his own team to win a baseball game? Will gamblers be able to influence a player’s performance? It’s not that far-fetched.  The concept of Fantex is likely not an issue that leagues and unions negotiated over during the most recent round of collective bargaining. Might they now want, or even have, to? Could express language be incorporated into a standard player contract as to whether or not this type of agreement is permissible for an athlete to enter into?

From the NFL’s standpoint, might there already be a present conflict of interest? John Elway, the Executive Vice President of Football Operations for the Broncos, happens to be on the board of Fantex. Does this mean that he has to root for the success of Arian Foster and Vernon Davis? What happens if the Broncos play the 49ers in the Super Bowl? Elway surely knows that a strong game for Vernon Davis against his team could significantly increase the long-term value of his brand. Does his integrity now come into question?

Finally, what about the companies agreeing to endorsement deals with these athletes? Nearly all of those contracts contain confidentiality clauses that prohibit either party from disclosing exactly what the deal entails. Pursuant to the Fantex agreement, an athlete must fully disclose all deals that represent more than 10% of their “brand income.” Looking forward, if an apparel company wants to agree with Andrew Wiggins, the presumptive #1 pick in the 2014 NBA draft, on an endorsement contract comparable to the one’s signed by Derrick Rose and LeBron James, will that company grant a release from the confidentially clause and permit full disclosure so Fantex can accurately determine how successful that athlete’s brand is? Not likely.

At this point, the idea of Fantex leads to more questions than answers, and the questions posed merely scratch the surface. But with Fantex facing long odds, it’s likely they won’t need to be answered. However, if it beats the odds, it sure would be fun seeing a ticker flash: “Arian Foster 10.51 .50 (5.01%).”