The Rise of Deferred Contracts in Major League Baseball

Episode Notes

Transcript

Jeremy Evans:

You really can’t be upset with the Dodgers franchise for trying to win. And that ultimately that if you’re not winning, you’d be upset. But at the end of the day, the Dodgers are playing within the rules at other team has the same access to the same rules to be able to put contracts together and defer them. And I think it’s a benefit to the Dodgers that not only did they invest in analytics and in developing their farm, which they’ve done for years, but they’ve also now at the forefront of finance.

Announcer:

Welcome to the award-winning podcast, Lawyer 2 Lawyer with J. Craig Williams, bringing you the latest legal news and observations with the leading experts in the legal profession. You are listening to Legal Talk Network.

J. Craig Williams:

Welcome to Lawyer 2 Lawyer on the Legal Talk Network. I’m Craig Williams, coming to you from Southern California. I occasionally write a blog named May It please the court and have three books out titled How To Get Sued the Sled and my newest book. How would You Decide 10 Famous Trials That Changed History? You can find all three on Amazon. In addition, our new podcast miniseries in Dispute, 10 famous trials that changed history is currently featured here on the Legal Talk Network and on your favorite podcasting app. Please listen and subscribe with professional supports Market in the United States being over $50 billion yearly. It’s no wonder that innovation continues to thrive in the industry. This is especially apparent in Major League Baseball this year from coast to coast with the New York Yankees making a big hit, pun intended, with their new torpedo bats along with the Los Angeles Dodgers adoption of deferred contracts for many of their newly signed players. Today on Lawyer 2 Lawyer, we’re going to take a closer look at those deferred contracts in Major League Baseball, what they are, their pros and cons, and how they may revolutionize the world of professional sports. And to do that, we have with us today Jeremy M. Evans. Jeremy’s an attorney and CEO of California Sports Lawyer, a law practice in Los Angeles representing entertainment media and supports clientele in contractual intellectual property and deal making matters in addition to his legal work, Jeremy is also the host of the California Sports Lawyer podcast. Jeremy, welcome to the show.

Jeremy Evans:

Well, thank you for having me. It’s an honor to be with you. Thank you.

J. Craig Williams:

Well, you’re quite welcome. We feel like it’s an honor to have you tell us how you got involved with the sports industry.

Jeremy Evans:

It’s interesting. I think in sports you sort of come across two different kinds of people in general, those who have strived to be in sports and entertainment from a very early age or those who kind of end up in it for some reason or another, they work on some deal. And then next thing you know they’re a part of an ownership group and a team or something like that. Mine is kind of a mix of the two in that I grew up in and around Hollywood and in and around sports and entertainment and always had an interest and a passion for it. Did some plays as a kid, loved playing sports, particularly baseball and basketball and then ultimately, but I had this vision of becoming a district attorney and that was mainly based on me watching Law and Order episodes over the years. So sure enough, I get into law school, get some experiences that in court and working for the public defender and working for civil litigation firms and big law firms and small law firms, medium-sized law firms, and all that experience kind of led me to believe that I did not want to be a litigator, did not want to spend my career in court.

I love the theatrics of being in court and the drama of it in the sense of an acting part, but did not like the sort of combative relationship between the parties. It was much more of a deal maker and a statesman and really wanted to pursue a career in that regard. And so had a few experiences in law school where I competed in a baseball arbitration competition at Tulane Law School. Ended up starting a negotiation competition and that really led to me starting a practice in entertainment and sports. I had a ton of experiences that I liked and didn’t like and thought, well, if I’m going to open my own practice, I might as well shoot for something that I really love. And that’s how it all started.

J. Craig Williams:

That’s a really interesting path to get there, which leads us right into what’s going on in baseball these days and the upcoming collective bargaining agreement, expiration next year, and this whole concept of deferred contracts and how they differ from the other sports that are out there.

Jeremy Evans:

What’s interesting, Bryce Harper the other day, obviously very well-known baseball player for the Philadelphia Phillies and has been a phenom for a while now, and one of the more well-known players when asked a question by a reporter about his thoughts on the Dodger spending, and I’m paraphrasing, but essentially his response was, you really can’t be upset with the Dodgers franchise for trying to win. And that ultimately that if you’re not winning, you’d be upset. But at the end of the day, the Dodgers are playing within the rules. Every other team has same access to the same rules to be able to put contracts together and defer them. And I think it’s a benefit to the Dodgers that not only did they invest in analytics and in developing their farm, which they’ve done for years, but they’ve also now at the forefront of finance. And that makes sense because their main ownership is the Guggenheim group. To me, if I was the other teams, I would begin investing in analytics, begin investing in finance, because what this all boils down to is just using the existing rules to finance players essentially. And it’s almost impossible not to take that approach as sort of salaries continue to rise and as the cost of doing business continues to rise,

J. Craig Williams:

Right? But there’s an imbalance here that is behind the scenes that’s not part of this discussion, and that’s the imbalance that’s created by the amount of money these teams make on media. For example, the Dodgers are huge because they’ve got this contract with Time Warner and the Mets apparently have some significant income sources. Not all the teams have those income sources to be able to finance these contracts like that. And that’s where the imbalance lies. Right.

Jeremy Evans:

Well, it is a good point, and I think part of what Major League Baseball and other sports try to do is to introduce parity between the teams, right? So in baseball they have the luxury tax. So if the Dodgers or any other team spends more, they get taxed at a certain rate and that rate continues to go up, the more they go over the luxury tax amount. And then that money goes back to the other teams in the league. And I guess I would point to the Tampa Bay Rays as an example of a team that does not have the resources the Dodgers have in terms of a television deal. They don’t even have a current home for a baseball stadium because of the hurricanes that came through there, but they still consistently compete at the top of their division, and they’re playing in the same division as the Yankees and the Red Sox and the Toronto Blue Jays who just signed Vladimir Guerrero Jr, to a 14 year deal over $500 million.

So the raise have proven they can do it. And the other thing is, is that what people are not realizing is that yes, the Dodgers play in a bigger market, you can’t prevent that. That being said, you also have this point of there is additional revenues that are coming into the league through sponsorships, through the selling of technology. The technology actually that’s used in streaming was sold to Disney. So there’s other monies coming in. The other point that I would mention is there is a great book on this by an author named Michael Shapiro, and it’s entitled Bottom of the Ninth. And it’s all about how Branch Ricky tried to start a new baseball league called the Continental League back in the 1960s. And without getting into the nitty gritty of it, the point is is that at that point in time in history, the NFL went one direction and Major League baseball went a different direction. NFL went to national contracts, the major league baseball went to local contracts. What we’re now seeing is Major League Baseball doing a reverse course and trying to go more national. They’re trying to sell MLB TV to networks and get it distributed in a larger fashion. So I think we’re going to start seeing more money coming into these smaller market teams to correct that imbalance

J. Craig Williams:

At this time. Let’s take a quick break to hear a word from our sponsors. We’ll be right back and welcome back to Lord a lawyer. I’m joined by Jeremy Evans, CEO of the California Supports lawyer law firm. What about salary caps that means to be able, is that going to be a fight as we see coming up? Are we going to get a lockout as a consequence of it?

Jeremy Evans:

I don’t think that’s going to be the case because the owners are not going to push for a salary cap and neither are the players because players don’t want it and the owners don’t want it. I think ultimately major League baseball is okay with the luxury tax. I think the biggest conversation is going to be around these deferrals and contracts. And so for example, and I really applaud the Dodgers for this because if you’re paying, let’s use show Tani, right? If you’re paying him close to $70 million a year, which is essentially 35 million for his hitting abilities and 35 million for his pitching abilities, you have the situation where that money sits and gains interest. So that’s one way for the Dodgers to make additional money. The Dodgers are also bringing in advertising dollars, and then secondly, the luxury tax or the money they pay these players is going to be far more expensive in 10 years.

So $70 million now might seem expensive, but in 10 years maybe not so much. So a salary cap in terms of well, what does the data say? The data says that there’s actually not much difference. Actually baseball has fared better with regard to teams winning divisions and going to the World Series and winning the World Series as opposed to other sports, even though they have salary caps. So I actually prefer the baseball model. I think that if a team wants to pay more for a player and build a team, then it should be able to do that, but it’ll pay a penalty for it. The other thing I’ll mention is this too, and again, I applaud the Dodgers for this in that not only do they have the most expensive team, they also have the best farm system. And that’s not by accident. And I mentioned this because no team in my memory has ever paid for a team to win.

You might complain about it, but when people talked about the Yankees of the late nineties and they won four World Series, most of the players on that team were through their farm system, the Derek Jeters, the Jorge Posadas. My point is that it’s constantly a balance. You have to develop a good farm system, you have to sign good players. And it’s not that these owners don’t have the money, it’s that a lot of the owners don’t want to spend the money because they’re running it as a business, which I understand, but if you want to compete, you have to spend the money.

J. Craig Williams:

And is competition really what the game is here or is it really making money?

Jeremy Evans:

Well, and I think that’s a good question. I think that, and this is sort of what Bryce Harper was saying, his answer to the question is really my answer, which is you can’t blame the Dodgers for spending money to try to bring in and keep their best players as opposed to trading your best players or as opposed to not spending money. So I think the question is not whether baseball is about making money or whether it’s about winning. I think the point is is that you have certain teams that are more focused on winning and certain teams that are more focused on making money or not going bankrupt or whatever their financial situation is,

J. Craig Williams:

And in this political climate, and without getting into politics, I think I really need to ask the question about government involvement. I mean, we saw California legislative bill introduced for salary caps, if I correct on that. And elsewhere in politics, we’ve seen government become involved a lot more than it used to be. Do you think that’s a possibility? And how would that affect baseball in terms of its contracts?

Jeremy Evans:

I do not think Congress will get involved. I think that’s an overstep and an overreach. And I think we’ve actually seen that through history, that ultimately the only time Congress has gotten involved is to sort of push an issue or to push a narrative with regard to something that’s going on. Lemme give you an example, steroids, the whole issue that happened there. Congress got involved and had hearings only to push it along. Or if there’s a delay in the start of the season based on the covid for example, or there’s a delay in the season based on the fact that they can’t come to an agreement in a collective bargaining situation, it would be an overstep for Congress to get involved into a private entity. Now, where can the government have an effect? One is through obviously antitrust law and the exemption that baseball and some of these other sports, particularly baseball have, and the antitrust exemption that is continually to be chipped away at. That’s one aspect. But in terms of getting involved in a labor negotiation, highly unlikely. There could be public statements, there could be hearings, but in terms of passing a law with a private entity, it would be litigated. And clearly the government would not have a place or standing to do that, to get involved in a private market in terms of baseball or basketball, whatever the other sport is.

J. Craig Williams:

We’ve seen deferred contracts, you and I’ve seen them both outside of sports, they’re used in C-suites all the time. Why has it taken so long to get into sports?

Jeremy Evans:

It’s such a great question because not only are you seeing deferred contracts in that regard, you’re also seeing it with regard to private equity investment. And I think this is where potentially some of the smaller market teams could get involved because now you’re seeing the NFL Major League baseball, pretty much every major of the top five sports all have now private equity investment opportunities for the most part. So I think what we’re seeing is that the competition is becoming very difficult and the ability with analytics to sort of help add additional parity ability to draft better these sort of different financial structures, I think it’s just a matter of the ability to have access to information and people, which at this point in time we’ve never had more of. I think technology has allowed that. So I think that’s really where it’s coming from. I also think that sports tend to be more traditional and they tend to be more closed off because you really have 30 owners inside of a system that’s really closed off. So I don’t think that, it’s not like you’re competing in an open market where you have Amazon versus the rest of the world. What you really have is basically 30 private owners or 32 private owners inside of a group competing, and that tends to not invite in outside investments. And so I think we’re just seeing a change in the market to allow some of these things to play out.

J. Craig Williams:

How about the fan base? I mean, from what I’ve read, it seems like fans are quite upset at the deferred contract basis because they view it as a huge imbalance.

Jeremy Evans:

I guess I would pose a response to say this, ultimately it’s almost like the player on your team that everybody else doesn’t like that when you play them, right? So I’ll give an example. Like Draymond Green, right? For the Golden State Warriors, great player, but there is often people who play against them don’t like him because, or the Dennis Rodman’s, right? And I think this situation’s very similar to deferred contracts because if your team was spending the money to defer contracts, they would not be complaining. I think what fans are really complaining about when they should be complaining about is their teams not spending the money and doing what’s necessary to ultimately effectuate a winning team. And I think that’s where the imbalance is, is that you have certain ownership groups that are not willing to push forward and to spend money. Now, ultimately, I don’t think the players are upset about this. I think that when you’re coming to a collective bargaining agreement, there is going to be debate amongst the owners as to access to deferred money and that sort of thing. So again, I don’t think the fans, I think fans might be upset, but I think that’s more about how their team is performing and whether their ownership group is involved in investing in players or not.

J. Craig Williams:

Let’s take a quick break to hear a word from our sponsors. We’ll be right back and welcome back, dear lawyer. Lawyer, I’m back with Jeremy Evans. Deferred contracts seem to be a real benefit for some players to can get them because it allows them to be able to have money after they’ve finished playing baseball. And we’ve all heard the sad stories about players from major sports teams going bankrupt and having difficulties in life. But what about the concept of a salary floor? Because not everybody in baseball makes the kind of star money that the ones we’re talking about,

Jeremy Evans:

Right? No, and I would say every one of the major sports leagues has a minimum. Baseball is around 500,000. Once you make a 25 man roster, you have basketball. I think it’s like 1.1 million. Football is, I think is a little over a million dollars. There clearly is a floor when it comes to that. And of course the only difference between those sports is that baseball just has more athletes on each team, 27 man rosters versus basketball versus other sports. I think the other thing is too is that baseball has got the minor league system, so it takes longer for a player to go up through the system, whereas in basketball and football, you’re looking at anywhere from one to three years in college. So I think that’s sort of the difference in the rub. But even in baseball, you have an arbitration process where you can make money in your, because essentially for the first six years you’re controlled by the team, and after that you become a free agent and you can always sign a contract that can buy out those years or whatever. But that being said, you also have that year four, five, and six in your arbitration where you can make additional money. So for example, you could make an extra $20 million a year on top of your base salary. So there’s clearly ways that these athletes can get paid, particularly if they perform.

J. Craig Williams:

What about revenue sharing? I mean, are we seeing any possibility of revenue sharing coming into baseball like it is in the other sports?

Jeremy Evans:

It actually already is in baseball in the sense that if you spend over the luxury tax, that money goes back to the rest of the teams. So there’s revenue sharing in that regard. And then of course, anytime the major league baseball brokers a deal, there’s additional payments there. And of course, if your team makes the playoffs, there’s additional payments that come in that way as well.

J. Craig Williams:

Wonderful. Well, Jeremy, it looks like we just about reached the end of our program. So I’d like to invite you to share your final thoughts and provide your contact information for those baseball players out there that are ready to make millions.

Jeremy Evans:

Awesome. Well, Craig, an absolute pleasure. I appreciate you having me on. And I just think we’re in somewhat of a golden age of sports between college and professional. There’s so many opportunities out there. You can watch pretty much any sport online. There’s a growth of even the non hour five sports. But I think some things to look forward to in the future or to be aware of is obviously artificial intelligence in sports and the use of analytics and automation, particularly when it comes to referees and umpires, and of course the development of the college market with NIL. And of course the collective bargaining is always going to be a top issue every time we come up for a renewal in any sport. So thanks again.

J. Craig Williams:

Wonderful. Thank you very much. Well, here are a few of my thoughts about today’s topic. Obviously, deferred salaries are big money, but they’ve been used all the time in business CEOs and companies regularly. You hear about the kind of money that they make. Well, the kind of money that they make isn’t the kind of money that they made this year. It’s the kind of money they’re going to make when they retire or they get fired or their contract ends. So it’s not surprising that it made its way into baseball. And people that own baseball teams are business owners, and that’s what they do in terms of learning ways to skirt the law and skirt the rules and develop their team as best they can because that’s what the American way, well, baseball and apple pie. Here comes the season. Get ready for it and be prepared this year because they’re moving into Asia.

As you know, the Dodgers opener was in Tokyo this year as a bonus to this episode of Lawyer 2 Lawyer. Since we’ve talked about baseball, we’re going to give you a little teaser of the first five minutes of the episode of Indis Dispute on the 1919 World Series Black Sox scandal. The full episode can be [email protected]. Well, that’s it for my ran on today’s topic. Let me know what you think. If you like what you heard today, please rate us on Apple Podcasts or your favorite podcasting app. You can also visit [email protected], where you can sign up for our newsletter. I’m Craig Williams. Thanks for listening. Please join us next time for another great legal topic. Remember when you want legal think Lawyer 2 Lawyer

In Dispute Podcast Excerpt:

And up to bat. To lead off the bottom half of the first inning is the Cincinnati Reds second baseman Maori era. RA has had a quality year after missing the previous season while serving in the Navy having a 2 64 batting average through the season. And the first pitch from Kott is in for a strike. Eddie Kot, this year has been tremendous leading the American League in wins, innings pitched and winning percentage. The White Sox will rely heavily on his pitching in this World Series and the second pitch, oh, he hit him Kott second pitch was a wild one and hit Morey rest right in the back. My goodness. What an unexpected start to the game from the normally reliable seaco White Sox fans will surely hope this isn’t a bad omen for their team in this World series. The national pastime of baseball is a living, breathing, sacrosanct being for many ardent fans. And it was even more so in the 1920s when today’s innumerable distractions didn’t exist. So prominent was baseball’s place in American culture at the time that news of the cheating scandal from the October, 1919 World Series between the Chicago White Sox and the Cincinnati Reds was on the front page of every newspaper in the country. The phrase say It ain’t so. Joe first written in the Chicago Daily News quickly became immortalized when another reporter either mistakenly or artistically attributed it to an innocent young child standing outside the courthouse. As Jackson departed from the grand jury room, a small boy clutched at his sleeve and tagged along after him say, it ain’t so Joe. He pleaded say, it ain’t so. Yes kid, I’m afraid it is. Jackson replied. Well, I never would’ve thought it. The boy said. Joe’s response to the boy’s, plaintiff plea confirmed our biggest fear. It was true. Before the trial started, the jurors knew what you know, rumors of a fix, big time gangsters and gamblers players who were investigated by a grand jury with three of them supposedly confessing and grand jury indictments against the Black Sox and several of the gangster gamblers. As the story slowly unfolded, it became filled with all the colorful characters you’d expect from 1920s America baseball players with catchy nicknames, short-tempered gangsters slash gamblers, immaculately dressed in business, pinstripe suits, newspaper reporters and radio broadcasters with flowery descriptions of the trial as if itself was a baseball game, and even New York mob boss, Arnold Rothstein, who was alleged but never proven to be the impetus of the scandal. These characters all weave together to form the tapestry of this infamous story that broke America’s belief in the purity and innocence of baseball. So join us and grab a box of Cracker Jacks, a hot dog and a beer as we look at the trial of the 1919 Chicago Black Sox.

Unfortunately, the Black Sox trial transcripts were lost long ago, requiring modern day historians to rely on newspaper reports of trial testimony, which were sometimes sensationalized for their readers and at other times directly contrary to one another. So take the news reports and dialogue in this in dispute episode with a grain of salt. Most of the reports quoted here come from stories filed for the major news services of the day by two or three main reporters. Numerous other reporters covered the story for smaller local papers offering a slightly different take on the events from this reality. Admittedly, many of the facts about the scandal we’re about to examine are true to this show’s title in dispute. Breaking news from Chicago Black Sox called Deface Indictment 10 of 18 respond to Court’s Order, Chicago June 27th, 1920 10 of the 18. Defendants in the baseball trial that opened here today put in an appearance. The White Sox players, felsh, Seaco Williams, Jackson Del Weaver, and Berg were on hand when the case was called Fred McMullen. The other indicted player is on Pacific Coast, and his attorney stated that he would appear whenever the court ordered him to do so. He is under bond with the seven players in court appeared three other men accused as gamblers, Ben Levi, Louis Levi, and David Seltzer. Two other accused gamblers. Carl Zork and Ben Franklin of St. Louis, both of whom were also under bond, were not in court, but their attorneys presented affidavits to the effect that both were ill and asked for a continuance.

J. Craig Williams:

The case was filed on October 10th, 1920, and the criminal court of Cook County, Illinois, and the eight men out and the gamblers were arraigned months later on February 14th, 1921. But even though conspiracy allegations started flying back and forth between the teams fans right after the end of the World Series, more than a year earlier, the state’s prosecution languished until June, 1921. On the opening day of the trial, judge Hugo Friend first overruled the defendant’s motion to quash the prosecution’s five conspiracy charges. Number one, conspiracy to defraud the public. Number two, conspiracy to defraud Raymond Kracker sch the White Sox catcher out of his World Series. Bonus number three, conspiracy to commit a confidence game number four, can conspiracy to injure the business of the American League. And number five, can conspiracy to injure the business of Charles a Comiskey, the White Sox team owner. This episode is in memory of Paul Kenney, who is the father of our longtime producer, Kate Kenney. Paul passed away last week. He was a substantial and prominent trial attorney in Massachusetts, created a legacy at Kenney and Conley PC that will continue for generations to come. We mourn his passing.