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Thursday, June 18, 2015
New NHL Draft Pick Compensation Rule for Fired Coaches, GMs May Violate Antitrust Laws

Fired NHL coaches such as Dan Bylsma and Todd McLellan may have been told that their services are no longer required, but they continue to reap benefits for their former clubs. Likewise, Peter Chiarelli (the recently-deposed general manager of the Boston Bruins who was just hired for the same job by the Edmonton Oilers) remains a key part of the Bruins’ rebuilding plan. What do these fired employees have in common? Each was fired with one or more years remaining on their contract, and have had their future employment contingent on their new teams paying draft pick compensation to the former clubs. In Bylsma’s case, the Buffalo Sabres (his new employer) were required to tender a third-round draft choice to the Pittsburgh Penguins (his former club) as compensation for hiring him, even though Bylsma last coached during the 2013-14 season. Chiarelli and McLellan proved to be an even costlier acquisition for their new employer, the Oilers, who were forced to part with two high draft picks (a second-rounder and a third-rounder) as compensation for hiring them, even though both had just been fired by their former teams. 

The New Policy

This bizarre practice, described as a “disgrace” and “immoral, or close to it” by longtime New York Post hockey columnist Larry Brooks, is the result of a new NHL policy approved last June by the Board of Governors and implemented at the end of the recently-concluded regular season. Under the new policy, if a coach, general manager or president of hockey operations is fired but remains “under contract” (meaning he continues to be paid), their former teams are entitled to draft-pick compensation from the team hiring the fired person. The compensation for hiring any of those three positions is a third-round draft pick in the offseason or a second-round pick if the hire is made during the season. For the fired coach, his offseason is deemed to begin when his current team’s season ends (including playoffs). For a general manager or president of hockey operations, the offseason begins only after the NHL draft concludes in June, after most open executive jobs have been filled.

It appears that the NHL enacted this new policy to appease teams that lost rising (and under-contact) front-office executives to other organizations without receiving any compensation in return. The Detroit Red Wings experienced two such defections in recent years. In 2006, Steve Yzerman (then one of the team’s vice-presidents) left the Wings to become the general manager of the Tampa Bay Lightning (a Stanley Cup finalist this year). Four years later, Jim Nill (the Wings’ assistant general manager) was hired as general manager by the Dallas Stars. The Red Wings received no compensation from either team. A similar controversy erupted in 2006 after Dean Lombardi left the Philadelphia Flyers (where he had been a pro scout) to become general manager of the Los Angeles Kings. The Flyers were not compensated either. These defections paved the way for the enactment of the new NHL policy, as teams believed that they should be compensated for developing managerial talent, whether in the front office or behind the bench.

But does the new policy go too far? It would appear so on several levels. A rule that was designed to provide compensation for the loss of a front-office executive or coach who was still working for his current team has been converted into a “back-door” non-compete clause by which teams could prevent fired employees from finding work with other organizations, unless, of course, the new team were willing to fork over a high draft-pick. That could not have been the intent of the new rule. Nevertheless, it has been exploited as such by the Bruins, Penguins and Sharks (perennial Stanley Cup contenders) to the detriment of the league’s cellar dwellars (the Sabres, Oilers, and Toronto Maple Leafs, which had to pay a third-round draft pick for hiring Mike Babcock, even though his contract with the Red Wings was about to expire).  

Issues of Competitive Balance

From a competitive standpoint, this new policy could have the unintended affect of creating an even greater disparity between the league’s “haves” and “have-nots,” as the more successful organizations (especially those that have a deeper pool of front-office and coaching talent) would be able to add more draft picks (the lifeblood of any NHL organization) while the league’s weaker teams would end up with fewer selections. In a seven-round draft, this can be a significant impediment to the rebuilding process.

One can also envision a scenario by which the league’s deeper-pocketed teams could systematically sign their coaches and front-office executives to longer-term contracts (or retain fired coaches and executives as “consultants” having minimal to no responsibilities) with an eye towards receiving future draft-pick compensation when another team wishes to hire them. The NHL has attempted to mitigate this risk by capping the number of compensatory picks that any one team could receive over a seven-year period to just two. But at the same time, the league did not cap the maximum number of draft picks that a team could lose as a result of having a “revolving-door” of head coaches and front-office executives (a scenario that Maple Leafs fans know all too well).

Additional competitive balance concerns arise out from the “discretionary” nature of the rule. Teams can waive draft pick compensation if they so choose. We have already seen this occur with the New Jersey Devils’ recent hiring of Ray Shero as general manager; his former team (the Penguins) did not demand draft-pick compensation from the Devils. This could lead to accusations of a “double-standard,” with the Penguins insisting on draft-pick compensation for Dan Bylsma while waiving it for Ray Shero (even though both were fired one year ago with time remaining on their contracts). It also suggests that “cronyism” is alive and well in today’s NHL, as general managers with close relationships may be less likely to demand compensation from a friend or frequent trading partner.  

There are also concerns about gamesmanship, with teams potentially using the demand for draft-pick compensation as a “stick” to avoid having their fired coach or executive going to work for a division rival, while waiving it for a team in another division or conference. 

Antitrust Concerns

But the NHL may have an even bigger problem on its hands: antitrust law. The league’s new policy can easily be seen as restricting the employment market for fired coaches and front-office executives.  For every Mike Babcock, Dan Bylsma and Peter Chiarelli (each of whom has won a Stanley Cup and had little trouble finding comparable work), there are the John Tortorellas and Craig Berubes of the world who will have a hard enough time finding new employment even without the new draft-pick compensation rule. But when draft-picks are added to the mix, these candidates may find themselves “iced” out of the NHL. The league’s new policy could have the effect of shrinking the employment market for fired coaches and executives, who could see viable job opportunities quickly vanish due to excessive compensation demands made by their former clubs. Since the NHL is the only major professional hockey league in the United States, there is nowhere else for these fired coaches and executives to turn (save for a step down to the minor leagues, where they might languish for years before receiving another viable NHL opportunity).

In antitrust language, the league’s new policy could be seen as competitors “joining hands” to restrain competition in the labor market. U.S. courts have consistently recognized that antitrust laws presumptively apply to employer-imposed restraints on labor markets. Just as antitrust law seeks to preserve the free market opportunities of buyers and sellers of goods, it also seeks to do the same for buyers and sellers of employment services. Antitrust law addresses employer conspiracies controlling employment terms precisely because they tamper with the employment market and impair the opportunities of those who sell their services there.

Let’s use John Tortorella as an example. Although he was a Stanley-Cup winning coach for the Tampa Bay Lightning (in 2004), Tortorella has been fired twice in the last two calendar years, most recently by the Vancouver Canucks at the conclusion of the 2013-14 NHL regular season (after the team missed the playoffs). At the time he was fired, Tortorella still had 4 years remaining on his contract with the Canucks (for illustrative purposes, I will assume that there was no buyout clause, although a well-connected source believes that there was one). While Tortorella has had great success as an head coach (he is, after all, the winningest American-born NHL coach with 444 victories), his recent lack of success and string of controversies (see here, here, here, and here) may limit his future NHL head coaching opportunities. In other words he is no Mike Babcock. But as an accomplished coach, Tortorella would undoubtedly have NHL teams interested in his services. The rate of coaching turnover in the league is just simply too high to ignore a qualified candidate as Tortorella, who is known for quickly changing the fortunes of his teams. But would prospective employers still be interested in hiring Tortorella if the Canucks (who are still paying his salary for three more seasons) insisted on a third-round draft pick as compensation? A team choosing between Tortorella and an equally qualified candidate (for whom no draft pick compensation is attached) might opt for the latter candidate to avoid losing a valuable draft pick.

In the example described above, Tortorella could have a good antitrust case against the NHL (which is headquartered in the United States). Through this lens, the new NHL policy can be analogized to a multiemployer agreement unilaterally imposing uniform industry-wide terms of employment on coaches and front-office executives in a manner that unfairly restrains competition in the labor market.  Such agreements are a violation of the U.S. antitrust laws, and, in particular, Section 1 of the Sherman Act. Tortorella’s potential antitrust case against the NHL would be strengthened by the unique nature of professional sports. With few exceptions, athletes (and coaches) typically excel in just a single sport and would not be able to profitably switch to other lines of work. In Tortorella’s case, his only head coaching experience is in the NHL, which is the only major U.S. professional hockey league. While he could theoretically find work as a television hockey analyst, such jobs are much less lucrative (not to mention scarce) and Tortorella’s temperament and prickly media relations may work against him finding employment in that field. Tortorella’s case would also be aided by the fact that there is no collective bargaining agreement between the league and its coaches, thereby preventing the league from claiming a statutory labor exemption to the U.S. antitrust laws.

How would the NHL defend such a lawsuit? First, the league would probably argue that Tortorella does not have legal “standing” to sue the league for a violation of the Sherman Act. But such an argument would likely fail because most courts have held that an employee is allowed to challenge antitrust violations that are premised on restraining the employment market. Here, Tortorella would argue that he has suffered an “injury” for antitrust purposes because his employment opportunities have been restricted by the new NHL policy.

Assuming that Tortorella can overcome the “standing” hurdle, the NHL would then likely argue that Tortorella has not suffered any damages since he is still being paid by the Canucks for three more seasons (at the rate of $3 million annually). But Tortorella could counter that by arguing that the inability to ply his trade (albeit, while still being paid) harms his ability to land future NHL jobs when the contractual payments cease.  A coach who has been out of work for multiple seasons faces an even more uphill battle landing a future NHL head-coaching job than one who was just recently fired. Thus, the NHL’s no-damages argument would likely fail.

However, Tortorella would face several practical problems advancing such a suit against the NHL. Antitrust cases are notoriously difficult to plead and prove, and are quite expensive. Without a coaches’ union funding the costs of the litigation, Tortorella (or any other fired coach or executive) may be reluctant to pay the steep lawyers’ fees typically associated with antitrust cases. Antitrust cases can last for years, and could cost a plaintiff millions in legal fees. Tortorella may also be reluctant to take on the NHL for fear of being blackballed from future jobs. But for older coaches or front-office executives, an antitrust lawsuit may be a viable last resort.  And if the litigation costs can be funded by a coaches’ trade association (or brought as a class action and pursued on a contingent-fee basis), an antitrust case against the NHL arising out its new policy could become a major headache for the league.

Is the New Policy Already On Its Way Out?

These antitrust concerns—or more likely, complaints about the fairness of the new policy—may have resonated with the league office. Recent reports indicate that the NHL may soon end the practice of requiring draft-pick compensation for fired coaches and front office executives. As first reported by Elliotte Friedman of Sportsnet, the NHL is going to revisit this issue at the next Board of Governors meeting in late June. Friedman believes that the policy will be “straightened out” at the late June meeting so that draft-pick compensation going forward will be limited to coaches and front-executives who were still working in that capacity for their former clubs when hired by the new team.

If the policy is revised, as expected, the NHL will not have to worry about John Tortorella or other unemployed former coaches and executives filing antitrust lawsuits against the NHL (as unlikely as that would be in any event). But the league’s apparent change of heart does raise an interesting question: will the NHL require the Bruins, Penguins and Sharks to return the draft-pick compensation that those organizations received this off-season from the teams that hired their fired employees? If the policy was never intended to apply to fired coaches and front-office executives, then the Sabres and Oilers would have a compelling argument that they should be receiving their draft picks back. For the Oilers, who have missed the playoffs an astounding nine years in a row, this is especially important since they were required to give up two drafts picks at the top of this year’s draft for hiring Chiarelli and McLellan. While the Oilers can take comfort in the knowledge that they won the Connor McDavid lottery (perhaps the NBA’s woebegone New York Knicks can hire somebody from the Oilers to represent the Knicks on the dais in future NBA draft lotteries), the loss of a second-rounder and third-rounder from the same draft will no doubt sting, and provide the Sharks and Bruins with an undeserved windfall. Perhaps the NHL will also address this issue at the next Board of Governors meeting.


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