Correcting the Kovalchuk contract crisis

Nicholas J. Cotsonika

What is the difference between salary cap management and salary cap circumvention?

It isn’t clear in the collective bargaining agreement between the NHL and the NHL Players’ Association. It wasn’t clear in the ruling by arbitrator Richard Bloch that upheld the rejection of Ilya Kovalchuk’s(notes) contract with the New Jersey Devils.

And it needs to be made clear now, with a second contract between Kovalchuk and the Devils waiting for approval, with other contracts under investigation, with penalties possible against people who break rules that aren’t black-and-white.

It cannot be left to common sense or the honor system. Teams, agents and players all need to know the rules of the game so they can go all-out as they do their jobs.

“All of a sudden you’ve got these threats of fines to everybody involved – the teams, the agents, the players – for circumvention,” said agent J.P. Barry, who was the NHLPA’s associate counsel from 1995-97. “It just seems like a really poison environment with no clarity…It’s a ridiculous situation because teams are trying to chart the future – we are, too – and we don’t know…We’re all flying blind.”

For the last week – or three weeks, depending on the source – the league and the union have been discussing how to better define circumvention of the salary cap. They’re still talking, having pushed back the deadline for a decision on a second Kovalchuk contract by 48 hours, to 5 p.m. (EST) on Friday.

It is in both sides’ best interests to reach an agreement on clearer cap rules. The status quo can lead only to more problems. With two years until the current CBA expires, there is too much time left to wait. There are too many contracts to sign in the interim.

“I think we have a problem right now where the lack of clarity almost creates a bit of a stalemate on people even talking because you don’t know what’s appropriate,” Barry said. “There’s probably a lot of extensions that still have to be done between now and the end of the CBA, so I would imagine that the PA and league are going to be looking to at least hammer something out for the next two years.”

Teams and agents always look for loopholes to exploit. But there are loopholes and then there are gaping holes.

The current CBA states that no one can take an action that “is intended to or has the effect of defeating or circumventing” the agreement. But the CBA also states that it is “not deterring or prohibiting conduct permitted by this agreement, the latter conduct not being a circumvention.”

There are no specific rules against the types of contracts that have pushed the envelope lately. The league kept warning teams and agents, but they kept getting bolder and bolder – until the Kovalchuk and the Devils went so far with a 17-year, $102-million deal that the league put its foot down.

Many were surprised when Bloch sided with the league, because even though the contract violated the spirit of the salary cap – taking Kovalchuk to age 44, with a $550,000 salary in each of the last five years – it didn’t appear to violate the letter of the salary cap.

“We were disappointed that they interpreted what we called the anti-circumvention provisions so broadly,” Barry said. “The problem we have now is, there were no guidelines given as to what is a circumvention… Other than saying that contract didn’t pass the provisions, it doesn’t tell us what contract does pass the provisions.”

The Devils and Kovalchuk’s agent, Jay Grossman, communicated with the NHL and tried to rework the contract in a way that would answer the league’s objections. The new deal is reportedly for 15 years and worth $100 million, with more money at the back end than the original contract offered.

The NHL obviously feels the second Kovalchuk contract circumvents the salary cap, too. Otherwise, the league would have registered it by now. But there are risks in rejecting it, beyond the fact that one of the world’s best snipers could play in the KHL this season, not the NHL.

The NHLPA could file a grievance, as it did the first time, and another case could go in front of another arbitrator. But what if this arbitrator rules in the union’s favor? Are we going to have a steady stream of creative contracts submitted, rejected and arbitrated, as agents and teams try to find the line and the league tries to keep everyone in check?

The New York Post reported Wednesday night that the league had issued the union an ultimatum. It would grandfather Kovalchuk’s second contract with the Devils, along with Roberto Luongo’s(notes) contract with the Vancouver Canucks and Marian Hossa’s(notes) with the Chicago Blackhawks, under two conditions. First, cap hits on future contracts would be calculated on the years until the player reached 40. Second, the five highest-paying years would be weighed more.

But sources on both sides said there was no ultimatum, and there are a lot of ideas being discussed formally and informally, between the sides and around the league.

The problem with Kovalchuk’s first contract wasn’t any individual aspect by itself – the term, his age at the end or the drop-off in salary at the end. It was the combination. It was the overall structure.

The simplest solution: require salaries to be flat across the board. Want to give a player $200 million over 20 years? Fine. He has to make $10 million each year.

That would provide no flexibility, though, so here is a compromise: forbid salaries from rising or falling by a certain percentage from year to year.

The CBA already has the “100 percent rule.” It states any increase in a player’s compensation cannot exceed the amount of the lower of the first two years of the deal and any decrease cannot exceed 50 percent of that. Example: If a player makes $2 million in his first year, he can’t make more than $4 million or less than $1 million in his second year.

“The rule addresses very nicely a lopsided two-year deal or a lopsided three-year deal, where you front-end load or you back-end load,” Barry said. “It creates some evenness in a short-term deal, but they never really addressed how its impact would be on a 10- or 15-year deal. They probably never thought there would be a 15-year deal. They hadn’t had really more than six- or seven-year deals before this CBA.”

Perhaps the NHL needs to try something like the NFL’s “30 percent rule.”

The NFL had a salary cap until this season. To prevent teams from back-loading contracts, pushing money into uncapped years, the NFL and NFL Players Association agreed to limit annual increases of base compensation to 30 percent.

Say the NHL and NHLPA agreed to limit salary increases and decreases to 30 percent within a multi-year contract. If a player makes $10 million one year, he would have to make between $7 million and $13 million the next.

That would allow some flexibility for cap management, but eliminate the dramatic swings that go to the heart of cap circumvention.

“I’m assuming there will be some kind of addition that clarifies how contracts can drop down or how long they can go, probably something to do with percentage drops,” Barry said. “We’ll have to wait and see.”

The PA might want more than a 30-percent swing. But at least then everybody – teams, agents, players, fans – wouldn’t be flying blind, like they are now.

“What happens is you get a stalemate, a deadness in the market,” Barry said. “People say, ‘Oh, we’re going to wait.’ And that isn’t to our advantage, either. I mean, you’re trying to secure some of the futures of your clients, and some of them are going to want to do longer-term deals.”