Circumventing the Cap: Did the Clippers’ $28 Million Endorsement Scheme Defraud the NBA?
With much fanfare, forward Kawhi Leonard recently agreed to a two-year, $115 million contract extension with his former team, the Toronto Raptors. Although Leonard’s homecoming is cause for celebration for many Raptors faithful, his arrival in The Six is clouded by the storm he left behind in Los Angeles.
Last September, sports journalist Pablo Torre alleged that the Los Angeles Clippers violated the salary cap set forth in the NBA’s collective bargaining agreement (CBA)—specifically with regard to their dealings with Leonard. A year after Torre’s initial reporting, New York-based law firm Wachtell, Lipton, Rosen & Katz, released its full investigation on the matter. The firm found that the Clippers circumvented the CBA-mandated salary cap by setting up $28 million worth of off-court endorsement deals for Leonard with four of its sponsors: Aspiration Partners, Boingo Wireless, Daktronics and Lockton Insurance.
Section 1 subsection (a) of Article XIII of the NBA’s currently adopted CBA states that no player can enter into an agreement, “to undertake any action or transaction … which includes any term that is, designed to serve the purpose of defeating or circumventing the intention of the parties as reflected by all of the provisions of this Agreement.” Subsection (b) follows saying, “it shall constitute a violation of Section 1(a) above for a Team (or Team Affiliate) to enter into an agreement or understanding with any sponsor or business partner or third party under which such sponsor, business partner, or third party pays or agrees to pay compensation for basketball services.”
This is not the first time the Clippers have come under fire for salary cap circumvention practices. In 2015, they were fined $250,000 by the league for their re-signing of center DeAndre Jordan.
The NBA’s CBA is typically renegotiated and renewed every seven years, and represents a contractual agreement between the league—the commissioner and the 30 team owners—and
the NBA Players Association. The transaction negotiated by the Clippers between Leonard and the franchise’s sponsors demonstrates the very conduct the CBA was intended to prevent. Moreover, their dealings represented a franchise desperate to divorce itself from consistently falling short.
Leonard signed with the Clippers in 2019 as a free agent. At that point, the team hadn’t made it past the first round of the playoffs in four years. Still hamstrung by the notorious trade that sent Shai Gilgeous-Alexander and five first-round draft picks to Oklahoma City in exchange for Paul George, the franchise was keen on building its future around Leonard. Ironically, the violations resulted in the forfeiture of five consecutive first-round draft picks, in addition to a $30 million fine. Leonard was assessed with a $700,000 fine for the role he played in the transaction.
While team President Steve Ballmer has declined to fight the punitive measures imposed on the team by the NBA, the story doesn’t end here.
Recent reporting from the New York Times revealed that what facially seems like a breach of contract may have federal implications. According to people briefed on the matter, the Department of Justice (DOJ) has opened a criminal investigation, with the scope of the investigation not yet publicly disclosed. Charges have yet to be filed, but DOJ trial attorney Michael Weinstein predicts that the issues at hand may fall within the realm of wire fraud.
The Federal Wire Fraud statute was enacted in 1952 to protect American citizens from schemes intended to defraud them of money in which the perpetrator utilized “wire, radio, or television communication.” The statute consists of two elements: “(1) a scheme to defraud and (2) the use of, or causing the use of, interstate wire communications to execute the scheme.”
In this case, Steve Ballmer and the Clippers’ circumvention of the NBA’s salary cap may constitute a scheme to defraud the NBA itself. In United States v. Gatto (2021), the defendants, Adidas employees in the sports marketing division, secretly paid the families of promising high school basketball players to encourage them to attend certain universities.
Those payments were a clear violation of NCAA rules, which, at the time, prohibited student-athletes from being paid for playing the sport. Since the athletes received money for their performance from Adidas, they were rendered ineligible to compete at the collegiate level and, thus, ineligible to receive athletic scholarships. However, the athletes who received payment from the defendants certified that they were eligible to compete and accepted athletic scholarships anyway. As such, the U.S. Court of Appeals for the Second Circuit found that the defendants’ conduct constituted “a scheme to defraud universities of athletic-based financial aid.”
The NBA's investigation into the Clippers determined that their facilitation of endorsement deals for Kawhi Leonard constituted a violative circumvention of the CBA-mandated salary cap. As in Gatto, there is a violation of an organization’s rules for the purpose of unfairly benefiting a particular team’s ability to recruit top talent over the league’s other franchises. Unlike in Gatto, there is not a clear answer as to what the Clippers fraudulently deprived the NBA of through their actions. One metric the DOJ may look to in order to find such a deprivation is the luxury tax payment.
The NBA luxury tax is a penalty imposed on teams whose payroll is above a certain threshold. The money paid by teams in the red is distributed equally between the franchises that come in below the threshold. By using endorsement deals to circumvent the salary cap to the tune of $28 million, the Clippers reduced their payroll and may have avoided being hit with a bill. Therefore, the DOJ may be able to make a case that Ballmer and the Clippers enacted a scheme to defraud the NBA of luxury tax dollars.
The second element of the fraud statute mandates that the Clippers used “interstate wire communications” in the execution of their fraudulent activities. Per the jury instructions provided by the United States Court of Appeals for the Third Circuit, interstate wire communication includes phone conversations and electronic signals such as fax, financial wire, and e-mail. In this digital age, it would be nearly impossible to conduct business without the use of any of the aforementioned digital mediums. Therefore, it is likely that the Clippers engaged in conduct that satisfies the second element. In the rare chance that they communicated via the mail, rather than web-based means, the analogous federal mail fraud statute would apply.
The ethos of sport is to provide athletes equal opportunities to compete at the highest level. Leagues strive to establish a sense of parity between franchises, encouraging competition, which in turn drives revenue. Although this case forces us to acknowledge the corporate nature of the NBA, the fabric of the CBA mandates certain conduct to instill a sense of integrity into the game of basketball. As shown, this breach goes far beyond a simple obligation from one party to another; it concerns the justice of sport as a whole.
*The views expressed in this article do not represent the views of Santa Clara University.
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