The League’s Case against Kovalchuk

According to infallible Twitter, the next chapter in the serial blockbuster known as Kovalchuk Month begins tomorrow, with day one of the hearing. There has obviously been a lot of chatter in the Kovalchukosphere about the NHLPA’s supposedly slam dunk case, Bettman’s vendetta against the Devils, the league not having a leg to stand on, the groundwork being laid for CONSPIRACY if the league should prevail, and even Brian Burke conceding, essentially, that these kinds of deals are bogus and bad for the league but basically allowed by the CBA.

I’m not so sure they are allowed,

as I said in a previous post:

[Burke] assumes that the only way to prove circumvention is to demonstrate that this one guy (Kovalchuk) will retire before he gets to the end of his contract. Obviously, one can’t prove that Kovalchuk will not play till he’s 44 anymore than one can prove Kovalchuk is not immortal. Yet the argument, “we just don’t know if he’s immortal, we will have to wait and see what happens,” as the basis of an employment contract that extends to the end of time, is incontrovertibly stupid. And we wouldn’t have to wait till the end of time (or his death) to prove it either.

I’ve laid out my argument in bits and pieces over several posts, but to celebrate Arbitration Eve, I decided to boil it all down to one short post. I failed to make it short. I was going to chop it up into several postlets, but with the actual hearing tomorrow, that ship has sailed, too.

As I have said many times, I have no idea who will prevail in this hearing. It’s a coin toss. If I had to guess, I would give the slightest edge to the league. My point all along has always been, no matter the outcome, I believe the league has a case. Who knows if the league would even agree with me that this is the case they should make. For all I know it would be one of those “stay off my side” situations.

The Implicit Limit on Term

  • The CBA does not explicitly limit the term of an SPC. One might reason that the absence of an explicit limit allows any length at all, 10 years, 17 years, 20, 50, 100, 100,000 years. The CBA doesn’t explicitly prohibit any of those terms.
  • There are two possible interpretations of the fact that there is no explicit limit on term. (1) there is no limit, period; (2) there is an implicit limit.
  • Let’s assume “no explicit limit” means “no limit.” If there is no limit, that means any number from one to infinity is allowed.
  • We have seen that adding so-called “tails” to contracts lowers the cap hit, because the cheap years at the end bring the average down. This, of course, is allowed by the CBA.
  • So let’s assume “no limit to term” is a legitimate loophole and we can exploit it to our heart’s content.
  • I want to pay Bob Smith $10MM a year for ten years. But I can’t afford the cap hit. So I structure the deal in this way: $10MM per year for each of the first ten years, then $5MM for one year (per the 100% rule), then $550K for the next 99,989 years.
  • It doesn’t matter if it’s obvious beyond the shadow of any doubt that the player will be dead for most of his contract. The player intendsto live forever, and I don’t know (nobody knows) that won’t happen. If there’s even a 0.0000000000001% chance of that happening, we can’t rule it out.
  • So, $55,098,950,000 ($55.1 billion) over 100,000 years. Cap hit: $551K. That’s a great cap hit! I must be a terrific GM.
  • And, since every contract is entitled to the 100,000 year term, when Bob’s brother Bill wants a new contract, I can apply that to Bill’s salary too.
  • But I don’t want to pay Bill what I pay Bob (Bill is a third-pairing defenseman with a history of concussions). I want to pay him $900K for five years, which is about as long as I think he can play, really.
  • So, the deal I offer him is structured like this, $900K for five years, followed by 99,995 years at $550K. That’s (calculator…), a cap hit of $550,017.50.
  • Bob retires after ten years, gets $100MM, and has a cap hit of $550,989.50. Bill retires after five years, gets $4.5MM, and has a cap hit of $550,017.50.
  • Difference in salary: $95,500,000. Difference in cap hit: $972. I could of course have made it a million year contract and reduced the difference to a fraction of a penny.
  • Soon, everyone will have one of these contracts (at least until the loophole is closed in the next CBA). No matter what a player really makes, his cap hit will be more or less indistinguishable from the league minimum salary for that year. Fortunately, ELCs will have much higher cap hits (since the CBA limits the lengths of those contracts), so that might help teams get to the cap floor (but only if they’re all due significant multi-million dollar bonuses and, ultimately, only if they actually pay out).
  • A system in which every player has the same cap hit regardless of salary would have the effect of catastrophically undermining the salary cap system, and anything that has the effect of undermining Article 50, even a teensy amount, is explicitly defined as a circumvention of the CBA.
  • Anything that causes a catastrophic failure of the CBA is a circumvention of the CBA. :)
  • Since assuming “no limit” leads to a circumvention of the CBA, we are left with “implicit limit.”
  • We have established there is a line somewhere. We just don’t know where it is yet.

Where is the Line?

  • Article 50 sets the players’ share of revenues at a fixed number relative to total revenue. The cap floor and ceiling are also fixed in relation to total revenue.
  • All of the players’ salaries for year x must come out of the players’ share for year x.
  • If the players’ total salaries for that year are more than the players’ share for that year, the players pay for that out of their own pockets, in the form of escrow payments not returned. Last year, I believe the players had to give back 11% of their salaries.
  • If Player X’s contract lowers the cap hit by tacking on a so-called “tail” of minimum wage years at the end of the contract, there can be a wide discrepancy between cap hit and salary in any given year. This is allowed by the CBA.
  • If Player X’s salary is, say, $11.5MM in one year, and his cap hit is only $6MM, there is a $5.5MM difference between the team’s cap hit and the player’s salary. The player gets paid his $11.5MM out of the fixed players’ share.
  • Player X’s salary is taking up a much greater slice of the pie in proportion to his cap hit. Everyone’s salary is proportionately reduced to make room for this $5.5MM discrepancy (and, in fact, all such discrepancies, i.e. the cumulative effect of all front-loaded mega-term tail-wagging deals).
  • This, too, is allowed by the CBA. Why?
  • Because elsewhere in the player’s contract, his cap hit will be much bigger than his salary (like at the end of Kovalchuk’s contract) and in those years the player population will benefit, because our hypothetical player is now “making room” by taking almost none of the pie relative to his huge cap hit. So, in a front-loaded contract, the player population takes a hit during the some years, but makes it up in other years, so it evens out. In other words, it’s fair.
  • But if the player retires after ten years, leaving seven years of minimum wage salary unclaimed, all of that comes off the books. No cap hit. No salary. No benefit for the players.
  • Our hypothetical player has gotten his benefit (paid up front). The team has gotten their benefit (been able to sign players they wouldn’t have otherwise been able to afford).
  • Who has paid for this? The other players, the ones who paid out of pocket in the early years of Player X’s contract. And the other teams, who did not get a fair and equal shot at signing players, because the team that cheated the cap gained an unfair advantage.
  • Therefore, since such a contract unfairly lowers the salary of every player, and gives the offending team an unfair advantage over rival teams, the contract undermines the cap system, and so is a circumvention of Article 50, provided that there can be no reasonable expectation the player will play to the end of his contract. That’s in italics because, at this point, we have not established a standard for determining at what point “there can be no reasonable expectation” of a player playing to x age.
  • But we have established that, if there is no reasonable expectation Player X will play to the end of his contract, then Player X’s front-loaded contract unfairly penalizes other players, is a circumvention of Article 50, and is prohibited.

Intent

  • One might object: “Where does the CBA say things have to be reasonable?”
  • The CBA specifically says (26.13b), “The System Arbitrator may find a Circumvention has occurred based on direct or circumstantial evidence, including without limitation, evidence that an SPC or any provision of an SPC cannot reasonably be explained in the absence of conduct prohibited by this Article 26.”
  • The CBA sets this standard. The (in this case) unprecedented length of the contract must have a reasonable explanation that is not prohibited by the CBA.
  • If the term of the contract is so long that it cannot reasonably be explained in the absence of prohibited conduct, then it’s a circumvention.
  • If it’s unreasonable to expect a player to play to (for instance) age 44, then what reasonable explanation could there be for having a contract with a term that long?
  • If the salary was the same as the cap hit for the length of the contract (a la Ovechkin, if Ovechkin were older), then a reasonable explanation might be that the team really likes the player and wants to lock him up beyond the point where he can reasonably be expected to play, just in case he’s the one in two thousand five hundred players who plays till he’s 44. There is of course no harm in doing so, because — since salary is level over the course of the contract — the team gains no unfair advantage by adopting the “unreasonable expectation” and whenever the player retires the contract is terminated.
  • But, if the contract is front-loaded, and the salary is minimal during the years which it is not reasonable to expect the player to play, the team benefits unfairly from the “unreasonable expectation” by getting a lower cap hit over the course of the contract.
  • This explains why the team is motivated to adopt the “unreasonable expectation.” Because it benefits by doing so. (See my post, Kavka’s Toxin/Kovalchuk’s Intent, for more nerdiness on this point.)
  • As has already been demonstrated, this unfair advantage penalizes rival teams and the player population as a whole, and so, has the effect of circumventing Article 50.
  • Since there is no plausible alternative motivation for the “unreasonable expectation” (assuming we have established that it is in fact unreasonable, as we will in the next section) that the player will play till he’s 44, other than the team’s intent to artificially lower the cap hit of the contract, we have now demonstrated both “effect of” circumventing and “intent to” circumvent the CBA.
  • Either one is sufficient. We have both.

What’s reasonable?

I have a feeling the meaning of these two words is going to be debated this week. So I cut/paste from Webster’s.

reasonable (adj) 1 a : being in accordance with reason <a reasonable theory> b : not extreme or excessive <reasonable requests> c : moderate, fair <a reasonable chance> <a reasonable price> [...] 2 a : having the faculty of reason b : possessing sound judgment <a reasonable man>

reason (n) 1 a : a statement offered in explanation or justification <gave reasons that were quite satisfactory> b : a rational ground or motive <a good reason to act soon> c : a sufficient ground of explanation or of logical defense; especially : something (as a principle or law) that supports a conclusion or explains a fact <the reasons behind her client’s action.>

  • When trying to determine how many years Player X is likely play, it makes sense to look at past players’ careers, to see if there’s some kind of pattern.
  • It turns out, there is.
  • Here’s a chart that shows the retirement ages of every player in league history up through 2006.

(via www.quanthockey.com)

  • Eighteen skaters (forwards and defense) out of 4,573 played past the age of 40. That’s a hair shy of 1:250.
  • Nine skaters made it past 41; that’s 1:500.
  • Four guys made it past 42; that’s not quite 1:1000.
  • Two guys made it past 43; that’s about 1:2500.
  • If you just look at forwards, fewer than 1:3000 played past 43. That’s one guy. Gordie Howe.
  • The odds of a player playing to the age of 44 are worse than the odds of a person correctly guessing – twice in a row – the identity of a card selected at random from a full deck of playing cards (1:52 x 1:52 = 1:2704).
  • The chances of a player playing to the age of 44 are 75 times worse than that of a giant asteroid hitting the earth on April 13, 2029(which is just barely outside of the term of Kovalchuk’s contract, by the way).
  • In terms of the historical data, the reasonable expectation of a player playing to the age of 44 is so minute as to be effectively zero. It could happen. But it’s profoundly unreasonable to expect it to happen.
  • (reminds me of the aphorism, “the odds of winning the lottery are so low that one does not appreciably lessen one’s odds by not buying a ticket.” But that’s really not part of this presentation.)
  • At this point, the location of the line has been narrowed down a bit. Namely, it’s lower than age 44.
  • That is sufficient to conclude that such a contract (a front-loaded contract with minimum-salary years extending to age 44) is a circumvention. Because wherever the line is, this contract is on the wrong side of it.
  • But it invites the question of the other ostensibly similar contracts, which take players to age 43, 42, 41, 40, etc.. Do they cross the line? And if so, why weren’t they rejected by the league?

Boiling the Frog

  • Let’s consider the anecdote of the famous frog that is put into a pot of cold water which is then heated sloooooooowly to boiling point. The frog doesn’t jump out of the pot because each fraction of a degree increase is so close to zero increase, that, at each point of comparison, (I’m quispifying the story, by the way) the frog might say, “warmer? Maybe, but it’s not that much warmer than it just was a minute ago. And that didn’t bother me, so why would this?” Result: cooked frog.
  • With each progressively extreme contract (extreme in the sense of how old the player will be at the end of it), the league evaluates the contract’s legality and officially approves it, but each time with more reservation. The league is the frog. It tolerates 39, then when 40 arrives, well, that’s pretty close to 39, so what’s the difference? Hardly seems worth jumping out now. Then comes 42, and that’s almost too much of a jump in “temperature” and the league issues warnings to the GMs about these “retirement contracts.”
  • Everyone’s on notice.
  • There is even a sense that, at 42, the water is just about at our limit of tolerance, and in fact the league starts an investigation as to whether any of these temperatures might be too hot.
  • And in the middle of that admittedly long-term investigation, with our tolerance already pushed to the brink, suddenly the temperature is turned up to 44. 
  • And Bettman jumps out of the pot before he’s boiled. Or something.
  • A contract taking a player to 44 might be so obviously over the line, while others that weren’t as extreme would be less obvious, or less egregious, and therefore less likely to make the frog jump.
  • That doesn’t mean, however, that those other contracts (Hossa, Luongo, et al) aren’t also circumventions. The CBA permits investigations of such contracts, even after the fact, with no time limit.
  • So, there are two answers to the question, how is Kovalchuk’s contract a circumvention while the others are not? (1) it’s a matter of degree. And (2) the others might well be circumventions, after all.

Why the Kovalchuk contract is different than other mega-term front-loaded tail-wagging retiree contracts

  • I don’t think the CBA prohibits long-term contracts provided that it’s reasonable to expect the player to play to the end of the contract. So, even though the term of the Kovalchuk contract is 17 years, that wouldn’t be the issue it is, if, (1) Kovalchuk were younger, say, 23 or (2) the salary was level across the term of the deal.
  • As demonstrated earlier, the odds of reaching 44 are twice as unlikely as reaching 42, and ten times worse than the odds of reaching 40. But even that doesn’t fully underscore the difference, because:
  • Hossa, for example, was 30 when he signed his deal. Kovalchuk is 27. Not only does Hossa have less distance to travel, but he’s got a three year “head-start.” This is statistically significant; about 1/3 of the skaters in NHL history retired between 27 and 30. This means that Hossa stands a greater chance of playing to the end of his contract, because his contract starts when he’s 30, and the pool of players still playing at 30 is more robust than the pool of 27 year olds, simply because they have survived that long already. Kovalchuk has three seasons to get there, and there is statistically a significant chance that a 27 year old player won’t get there at all.
  • This is easier to see in a chart.

I’ve graphed the likelihood, based on the quanthockey numbers quoted above, that a player of a certain age will make it through each subsequent year. The chart covers only the years 31 through 42, because these are the years that (mostly) overlap for the contracts of Hossa, Luongo, Zetterberg and Kovalchuk. Hossa and Luongo’s contracts started at 30, Zetterberg’s at 28, Kovalchuk’s at 27. Therefore, the odds of Kovalchuk getting to 31 (year four of his contract) are much lower than the odds of Hossa getting to 31 (year one of his contract).

Since I’m making my own eyes glaze over, maybe this is a better way to look at it: When Hossa signed his contract, the odds of him playing at least till he was 30 were 100%, because he had already done it. When Kovalchuk signed his contract (at 27), the odds of him playing at least till he’s 30 were (and are) somewhere around 60-70%. This has nothing to do with Kovalchuk or Hossa personally. The stats are based entirely on their respective ages and the historical data.

Two other important points. (1) Zetterberg’s line should stop at 40, although I have graphed the probability all the way to 42. (2) Kovalchuk’s line should continue off the right margin for two more years, despite being flat-lined at what appears to be zero.

Click on the graph to get a higher-res version that is still crappy to look at. I’m sorry about the quality here; I had a hell of a time getting the graph to format. The key is not legible, really, but the lines are, from top to bottom, Luongo, Hossa, Zetterberg and Kovalchuk. The x axis is years of age, from 31 to 42. The y axis is probability the player plays at age x, expressed in %.

Notice that the Kovalchuk line is consistently at the bottom, across the entire length of the contract.

Comps_medium

Here is a blow-up of the tail years:

Screen_shot_2010-07-31_at_6

Again, top to bottom, Luongo, Hossa, Zetterberg and Kovalchuk. The purple Zetterberg line should have stopped at 40, but I left it in. Luongo’s chances are slightly better than Hossa’s over the same period, because goalies on the whole retire later than skaters.

And, as a reminder, the bottom line — Kovalchuk — should extend another two years off the right hand margin.

  • This is a rather long way around to making the following point: if Kovalchuk’s contract stopped when he was 42, it would still be less likely for him to play to the end of it than for Hossa or Luongo, because Kovalchuk’s contract started three years before the other two. The fact that it starts earlier and ends later (in terms of the player’s age) compounds the (un)likelihood that Kovalchuk will play to the end of the contract.
  • It’s like he’s running a 17 year marathon, and three years in, Hossa and Luongo join him, and they all run together for 12 years, at which point Hossa and Luongo are done, but Kovalchuk still has to run for two more years.
  • Last but not least: the salary in the tail. A lot has been said about these tails and how they compare and how maybe they’re all more or less the same. Let’s compare the numbers directly: Kovalchuk to Luongo, Zetterberg and Hossa. Chart:
term tail tail/term tail value t$/yr top years ratio
Luongo 12 3 25.00% $3.6 $1.2 $23.4 15.44%
Zetterberg 12 2 16.67% $2.0 $1.0 $15.2 13.20%
Hossa 12 4 33.33% $4.0 $1.0 $31.6 12.66%
Kovalchuk 17 6 35.29% $3.5 $0.6 $68.0 5.15%
The columns:
term” = length of contract. “tail” = the length of the tail. “tail/term” = the ratio of the length of the tail to the overall term (i.e. how big is the tail relative to the “dog”). “tail value” = the total salary paid over the course of the tail years.“t$/yr” = the average salary during the tail years. “top years” = the total of the commensurate top salary years (for example, if the tail is 6 years long, “top years” tallies the top six salary years; if the tail is 2 years long, the “top years” column tallies the top two salary years). Lastly, “ratio” = the ratio of the tail $$ to the top years’ $$.

What does the chart tell us?

  • Kovalchuk’s contract has the longest tail by far.
  • Even given the extreme length of the contract overall, Kovalchuk’s tail still manages to take up the highest percentage of the overall deal (i.e. biggest tail-to-dog ratio).
  • The salary paid per year in the Kovalchuk tail is by far the lowest, and is the only one of the four that dared drop below $1MM per tail year; they went as low as you can go, $550,000.
  • Kovalchuk’s top earning years, meanwhile, are within a hair of being more than the other three players’ top earning years combined.
  • Last but not least, the ratio of the tail dollars to the top dollars is two or three times smaller than everyone else’s. Luongo gets about a sixth of his top salary during his last years. Kovalchuk gets about a twentieth.
  • Short version: Kovalchuk’s deal is the other deals with all the knobs turned up to eleven.

Circumstantial evidence relating to context

  • The Arbitrator is allowed by the CBA to consider circumstantial evidence.
  • Certainly, there may be more evidence than we on the outside looking in are privy to. But this will (have to) suffice:
  • Kovalchuk, reportedly, was looking for a deal worth approximately $10MM per year for 10 years. Whether this is true or not will be easy for the arbitrator to determine since all the parties will be present at the arbitration. If this turns out to be false, disregard everything I’m about to say.
  • The Devils were (and are) under cap constraints that would have made a $10MM cap hit prohibitive.
  • The contract, specifically by virtue of its long, minimum wage tail, gave Kovalchuk what he was looking for (approximately $10MM/yr for ten years), while giving the team what it was looking for.
  • If you assume Kovalchuk will retire after ten years, then he got exactly what he demanded.
  • The alternative is to believe he will play seven more years for peanuts. If it’s unreasonable to expect any given player to play till he’s 44, then it’s exponentially more so to think that this same player will play to an age only one player in thousands ever gets to, at what amounts to 1/20 of his peak salary. At that point, Kovalchuk may be making more than that in interest on his checking account.