Sports Business and the Law

I was recently interviewed on The Price of Business, a talk radio show that airs on Business Talk 1110 AM KTEK in Houston. The topic was one that I’ve spoken on many times – factors to consider before filing a lawsuit.

Take a listen and I’d be quite interested in hearing your feedback.

Some additional thoughts:

  • First, you can win in court and lose in the court of public opinion. Years ago, Barry Bonds was sued by his ex-wife, who was German. He had a prenup that she was trying to invalidate. Win or lose (he won), he lost in the court of public opinion.
  • Second, what is your opportunity cost? If you are going to spend tons of time on it, maybe you would rather do endorsements or sharpen your golf game.
  • Third is a quote from deceased Senator Everett Dirksen: “We must all rise above principle. “ Some things just are not worth pursuing.

Woman Carrying Baby at Beach during SunsetEvery once in awhile, we see something that smacks of a hypothetical. Russell Wilson and his singer wife Ciara have announced that they are expecting (which is wonderful). She has a child by a former relationship with rapper Future. He has no children.

They have said that they want to have a brood. Defining rights could be a challenge. Russell plays football for Seattle and they live there. Theoretically, the child of the former relationship has no rights to his estate unless he adopts. If he were to die, how would that child feel? (I did not say this was a law school hypothetical.)

My point being, in blended families particularly, decisions need to be made as to who gets what. Failure to do so may result in hurt feelings at best, legal and psychiatric bills at worst. Facing up to mortality is tough for all, particularly athletes, but failure to do so creates chaos.

After the 112th and 113th Congress produced the two least productive legislative sessions in modern history, the 114th Congress has picked up the pace and passed legislation—which was signed into law by President Barack Obama on October 7, 2016—that will provide some welcome tax relief for Olympic and Paralympic medalists.

Income tax
Copyright: yupiramos / 123RF Stock Photo

As Jeff noted in his August 17th blog post, the value of Olympic medals, as well as prize money won by Olympic medalists, are subject to federal income tax.  See H. Rept. 114-762 (noting that “[t]he prize money awarded to U.S. athletes by the USOC, as well as the fair market value of gold, silver, and bronze medals, is includible in gross income.”).  However, the passage of the United States Appreciation for Olympians and Paralympians Act of 2016 (the “Act”) makes a significant change to Internal Revenue Code and exempts from federal income taxation the value of any medals and prize money awarded to Olympic and Paralympic medalists.

In particular, the Act amends Section 74 of the Internal Revenue Code to state that “[g]ross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.”  For this past Olympics in Rio, the USOC awarded each Olympic athlete $25,000, $15,000, and $10,000, respectively, for each gold, silver and bronze medal, while Paralympic athletes received $5,000, $3,500 and $2,500, respectively, for each gold, silver and bronze medal.  Notably, the Act provides immediate relief for any Rio medalists, as the Act expressly “appl[ies] to prizes and awards received after December 31, 2015.”

The House Report noted that the Act was necessary to “provide immediate relief from unfair taxes.”  See H. Rept. 114-762.  According to the House Report, the House Ways and Means Committee felt that “the athletes who represent the United States on the global stage at the Olympic and Paralympic games perform a valuable patriotic service,” which often requires “years of personal sacrifice.”  Id. The Committee further felt the need for legislation because “during their years of training and preparation, many athletes representing the United States in the games earn little or no money from participation in their chosen sports and often defer pursuit of careers outside sports.”  Id.

The Act, however, still has important limitations.  First, this new exemption “shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).”  In other words, if an Olympic medalist’s adjusted gross income, prior to accounting for any Olympic medals and prize money, exceeds $500,000 (if unmarried) and $1,000,000 (if married), then the athlete cannot claim the exemption.  Thus, all of the members of the gold-medal winning U.S. men’s basketball team – which according to Forbes “earned a collective $257 million in salary and endorsements over the past 12 months” – probably won’t be claiming this exemption.

Second, the Act only exempts Olympic medals and prize money from federal income taxes.  The Act has no impact on any state income taxes that athletes may owe.  However, in response to the passing of the Act, New Jersey, Minnesota and a handful of other states have introduced, or are considering introducing, similar legislation at the state level.

All told, the Congressional Budget Office estimates that this tax exemption will “reduce revenues . . . by about $3 million over the 2017-2026 period.”  See H. Rept. 114-762.

Risk and insurance
Copyright: fuzzbones / 123RF Stock Photo

It is well known that sports teams, leagues and players often have insurance to cover risks. In the past, I represented an insurer regarding coverage or non-coverage for a sports league strike. An ancillary question is the duty or not of an insurance broker.

A few inside baseball concepts here. First, an insurance agent is most often construed to be the agent of the insurer and is often an employee of the insurer. A broker is independent, presents risks to insurance companies and is either considered to be the agent of the insured or an independent intermediary. In Moje v. Federal Hockey League LLC et al., a minor league hockey league faced suit involving injury to a blinded fan. The fan took a default judgment against the league. The victim sued the broker and so far the broker has won on the grounds that the injured person was not signatory to the insurance policy and the policy did not cover the risk.

Brokers are often sued for malpractice on the grounds that they should have known that an insured should have particular coverage. Truth be told, the brokers usually win. Absent explicit instructions, it is too easy for an insured to say after the fact that they had asked for certain risks to be covered. Unlimited “he said, she said” in this arena would make it impossible for brokers to do business.

Copyright: / 123RF Stock Photo

Derrick Rose’s defense team is seeking a mistrial in his much-publicized case due to new evidence – namely text messages that were allegedly undisclosed prior to trial.

When I meet with clients I tell them, “Tell me everything; we will deal with it.” Despite this, there are times where six months into the lawsuit, the client says, “Can I level with you?” I thought we had been doing this all along.

Worse yet is when the lawyer gets surprised by his client at trial. Let’s just say that good things rarely happen as a result. Be transparent and put everything on the table at the beginning. It is better for everyone.

One of my law school professors was well-versed in insurance law. He told me that he had any number of prominent non-coverage lawyers come to hire him as a consultant on discreet insurance questions. Invariably he would ask them upfront….”Have you read the policy?”  A surprising number answered that they had not, quickly got off the phone and oftentimes did not need to call back.

The 1977 movie “Black Sunday” portrayed an attempted terrorist attack at a stadium on Super Bowl Sunday. If this fictional attack had succeeded, would that be covered by insurance? Read the policy. In a June 1, 2016, article on active shooter incidents in Best’s Review, one insurance attorney noted that such events “can trigger a host of coverages such as general liability, business interruption and property insurance-to name a few.”

With given products, an incident that does not result in damage to a property is not going to trigger coverage for the extra expense or business interruption. It is not like a car crash or a tornado. In reaction to perceived need, certain insurers have developed specialty policies that have been dubbed “active shooter policies,” to fill in the gaps. While it is difficult to contemplate, sports executives should examine their policies to determine if they have coverage and if not, if they have a need.

David Kiefer writes:

With the calendar turning to September, that means that NBA training camps will open in less than one month. And while the players’ main offseason focus was on how the influx of new national television revenue will put more money in their pockets (8 players signed new or amended contracts worth more than $100 million this past offseason), a lesser-celebrated event – in this case, a change in the law – will lead to a number of players keeping a bit more money in their own pockets.

Copyright: / 123RF Stock Photo

Since July 1, 2009, NBA players who have played games in the state of Tennessee – both as visiting players and as members of the Memphis Grizzlies – have paid a $2,500 per game “Professional Privilege Tax for Professional Athletes,” up to a maximum of $7,500 per year. See T.C.A. §§ 67-4-1702, 1703. The tax was particularly onerous on minimum salary players, as the players’ union contended that minimum salary players had a nearly 100% effective tax rate for games played in Tennessee (after accounting for federal income taxes and any other state income taxes due in the player’s home state). However, as of June 1, 2016, NBA players no longer have to pay Tennessee’s $2,500-per-game privilege tax.

In passing House Bill 1134 and Senate Bill 1247 in April 2014, the Tennessee legislature removed NBA players (as well as NHL players, who were also subject to the tax) from the list of individual required to pay the state’s privilege tax. The elimination of the tax on NHL players was effective immediately, while the tax on NBA players remained in force through the 2015-16 NBA season.

Tennessee’s Professional Privilege Tax for Professional Athletes was unique for a few reasons. First, Tennessee has no state income tax, which meant that the tax was structured as an occupational license tax. NBA and NHL players – two groups of individuals whom typically do not require state licenses or certification to work as professional athletes – were nonetheless required to annually pay the $2,500-per-game tax, which was well in excess of the $400 tax due from other Tennessee-based professionals (such as accountants, architects and attorneys).

Second, the money collected from tax was “deposited into a municipal government fund located in the same municipality as the indoor sports facility in which the game was played.” T.C.A. §§ 67-4-1703(e). In essence, part of the tax revenues collected were paid to the operator of FedEx Forum in Memphis, which happened to be the ownership group of the Memphis Grizzlies (the portion of the revenues attributable to NHL players went to the operator of Nashville’s Bridgestone Arena, which also happened to be the owners of the Nashville predators). Those tax revenues were then used to attract other sports and entertainment events to the Memphis area, such as bowl games, concerts and the like.

Finally, Tennessee’s privilege tax was arguably unconstitutional. Prior to the tax being repealed, NBA players sought refunds of previously paid privilege taxes on the basis that the privilege tax violated the United States Constitution’s dormant commerce clause, due process clause and equal protection clause. Had the cases proceeded to litigation, these arguments could have proved meritorious, as Ohio’s Supreme Court recently analyzed similar taxes involving Cleveland’s municipal income tax and ruled that Cleveland’s tax violated players’ constitutional rights. See Hillenmeyer v. Cleveland Bd. of Rev., 144 Ohio St.3d 165, 2015-Ohio-1623, ¶ 49 (rejecting equal protection challenge and declining to address commerce clause challenge, but holding that the tax “imposes an extraterritorial tax in violation of due process, because it foreseeably imposes Cleveland income tax on compensation earned while Hillenmeyer was working outside Cleveland”); Saturday v. Cleveland Bd. of Rev., 142 Ohio St.3d 528, 2015-Ohio-1625 (declining to address constitutional challenges to Cleveland’s municipal income tax but holding that “a professional athlete whose team plays a game in Cleveland but who remains in his home city participating in team-mandated activities is not liable for Cleveland municipal income tax”).

Now, Tennessee’s privilege tax is no more, and players on all 30 NBA teams will leave Memphis with a little more money in their pockets.

David Kiefer is an associate in the Labor & Employment Department, resident in the firm’s Pittsburgh, PA office.

Income tax
Copyright: yupiramos / 123RF Stock Photo

When I took Federal Income Tax in law school, the professor got up in front of the class and for his opening line started out by saying, “The Federal Income Tax Code is a Social Policy Document.” And indeed it is. Taxpayers receive breaks for a variety of reasons, from owning a house and paying for child care to raising race horses.

How about Olympic medals? I bet you didn’t know that they are taxed. That’s right. An Olympic gold winner is awarded a $25,000 cash bonus per medal by the Olympic committee, and is taxed roughly $9,900.  Silver and bronze winners receive smaller cash bonuses ($15,000 and $10,000, respectively) and pay accordingly. Most states tax the recipient as well.

For someone who has carried the flag for his or her country, is this just? I draw a distinction between a Michael Phelps, who may or may not live on Wheaties, and an archery winner, who may be living in his parents’ garage. Just a thought, but it would seem to me that if you gross under $50,000 a year, the medal should be tax-free. Indeed, the U.S. Senate recently passed a bill to exclude Olympians’ and Paralympians’ winnings from their gross income. The House has yet to vote on a similar bill.

I once tried a police brutality case where the Highway Patrol (aka CHIPs) stopped a woman who had five children, not her own, in the car. We obtained her medical records and found out that she had suicidal ideation right before she got in the car with the kids. There went the plaintiff’s case. Half the jury thought that the cops had not hurt her, and the other half felt that SHE had a duty to warn the parents of the children that she was considering killing herself with five young ones in the car. Defense verdict.

Zika virus
Copyright: royaltystockphoto / 123RF Stock Photo

The duty to warn in California has a long history, but got expanded dramatically by the Tarasoff case. That involved a psychiatrist who had a patient that was allegedly threatening harm to a third party. The Court held that the psychiatrist had a duty to warn the intended victim if the threat as it was defined and the possible victim was certain.

Now let’s go to the upcoming Rio Olympics. A number of athletes have declined to attend on the premise that they are concerned about the Zika virus. Others have suggested that a number of golfers have bailed because there is no money to be had there. Do the team doctors have a duty to tell participating athletes about the threat? Is there a threat?

I would argue that

  1. The threat is minimal,
  2. Unlike Tarasoff, there is plenty of public information out there and
  3. Anyone going assumes the risk given public knowledge. It is a little like the abortive suit against the Oakland As for someone getting hit by a ball. You go, the risk is on you.