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CBA nuggets - What happens to the salary cap if 2020 games are cancelled?

A series of articles for the half-dozen people who care about the details of the labor agreement

As nearly every NFL fan is aware, the NFLPA and the owners negotiated a new agreement this offseason — one that narrowly passed the players vote, and will now control the game of football for the next 11 years. While the minutiae of legal agreements can seem boring, the fine print of this particular document very literally has a huge impact on the NFL, the players, owners and fans. Since we have some time on our hands unencumbered by mini-camps, OTAs or training camps, it seemed like a good time to explore the changes that the new CBA brings, and maybe some interpretation of how it may affect the league going forward.

Click here to access other articles in the CBA Nuggets series

In this series, I typically focus on changes to the CBA and their impact on the NFL season, but today I want to do something slightly different; that is, I want to look at a potential issue with the NFL’s 2020 season, and look to the CBA for guidance as to what will happen if some or all of the 2020 games are cancelled.

The CBA doesn’t actually have a lot to say on the topic. What it does have to say is buried in one of the longest articles of the Agreement — Article 12 — which deals with revenue and salary cap. To find the relevant passage, we go to Section 1 a(xii):

Cancelled Games. If one or more weeks of any NFL season are cancelled or AR [All Revenues] for any League Year substantially decreases, in either case due to a terrorist or military action, natural disaster, or similar event, the parties shall engage in good faith negotiations to adjust the provisions of this Agreement with respect to the projection of AR and the Salary Cap for the following League Year so that AR for the following League Year is projected in a fair manner consistent with the changed revenue projection caused by such action.

This is identical to the wording of the 2011 CBA, except that in the 2011 document this was Section 1a(xi), and the there was one additional sentence related to specifically to the 2012 & 2013 seasons.

So, this is not a new provision of the CBA, but because of the COVID-19 situation, we face the very real possibility of the NFL being forced to cancel some, or even all, of the 2020 games.

That raises a couple of questions.

First of all, if some or all of the 2020 games are cancelled, will the players still get paid?

There are some answers that we don’t get until they are decided in a court of law or by an arbitrator, and this might be one of them if worse comes to worst, but the NFL owners probably don’t have much of a case if they try not to pay players due to cancellation of games.

The reason is that there is no force majeure clause in the CBA.

What is force majeure?

I’m glad you asked. The subject I enjoyed most during my 4 years of studying business administration and management at VCU was Business Law, and one of the concepts I learned in that course was force majeure. I don’t think I’ve had the opportunity in the intervening 39 years to make use of my knowledge of the concept.

I found a pretty useful explanation of it online:

The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’ While force majeure has neither been defined nor specifically dealt with, in Indian statutes, some reference can be found in Section 32 of the Indian Contract Act, 1872 (the “Contract Act”) envisages that if a contract is contingent on the happening of an event which event becomes impossible, then the contract becomes void.

From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event.

By way of example, let’s cast our minds back to 2005, when Hurricane Katrina hit New Orleans in August. Let’s imagine that in July of that year, a contractor agreed to build an outdoor patio at a client’s home in the city. Work was scheduled to begin in late August.

Katrina hit, greatly damaging the client’s home, leaving New Orleans flooded, and the contractor unable to do the work. Assuming the contract has the relevant clause, under the principles of force majeure, the contractor is no longer bound by the contract to perform the work, and the client is no longer required to pay the money stipulated in the contract — at least they won’t have to do so within the specified time frames. Depending on the wording of the clause, then the contract may be void due to “an act of God”. Force Majeure.

Because the NFL Collective Bargaining Agreement has no force majeure provision, there seems to be little argument whether the owners need to pay the players if the games are not played. With no force majeure clause in the CBA, the owners should be held to the terms of the agreement; that is, they need to pay the players as long as the players make themselves available to play the games.

The owners could argue that the principle of force majeure should be applied, but since there is no force majeure clause in the CBA they would be on shaky ground. Here’s what the National Law Review website has to say on the subject:

When a party cannot perform its obligations under a contract because of an “act of God” or other unforeseen circumstance, the “act of God does not relieve the parties of their [contractual] obligations unless the parties expressly provided otherwise.” However, where the parties include a force majeure clause in the contract—a provision that allocates risk of non-performance in circumstances beyond the parties’ control—such “acts of God” or other circumstance may excuse performance.

Courts typically construe force majeure clauses narrowly.

Under the law of many states, including New York and Texas, the force majeure clause will be triggered only where the clause expressly includes the contingent event. Where a force majeure clause explicitly uses terms such as “disease,” “epidemic,” “pandemic,” “quarantine,” “act of government” or “state of emergency,” parties may, depending on the circumstances, be able to assert force majeure as a defense to non-performance or anticipatory breach in the case of the COVID-19 pandemic.

Notably, it is not enough for the party asserting the force majeure clause to show that the “act of God” or other event made performance merely more difficult or more economically burdensome; the party must show that performance of its contractual obligations has been prevented by the event. Taking precautionary measures or making a voluntary decision not to perform is not the same as being prevented from performance.

This tells us that, having not included a force majeure clause in the Collective Bargaining Agreement means that the NFL and the players’ union have not agreed to any contractual relief in the case of an “Act of God” or similar force majeure event.

Force majeure in any given situation is controlled by the law governing the contract, rather than general concepts of force majeure. The owners cannot, on the basis of general principle then, use the cancellation of games as a reason to refuse to pay players.

The controlling law is sometimes specified in the agreement, in which the parties state which law(s) will be used in enforcing the contract. However, if the law is not specified in the agreement itself, then it is decided by a statute or principals of general law which apply to the contract. The CBA is governed by Federal Labor Law. I spent a few minutes looking, but didn’t find any specific guidelines for the application of force majeure under federal labor law. I assume that there are no surprises, and that with no force majeure clause in the CBA, the owners are obligated to pay the players according to their individual contracts, even if some or all of the games are cancelled, which is not the same situation faced by NBA and MLB owners.

If some or all of the 2020 games are cancelled, what happens to the salary cap?

In the broadest possible terms, we’ve already answered this question by quoting the CBA; the NFL owners and the NFLPA will engage in good faith negotiations to adjust the salary cap for 2021

This is consistent with the CBA’s approach to the salary cap in all respects. The cap, once set for a season, is not changed during that season, but the following season is adjusted as needed, with the adjustments being done by accountants under the provisions of the CBA itself. The cap is already set for 2020. Any adjustments will be made in 2021 or later.

Ahead of each season, the league-wide salary cap is defined after making adjustments for things like changes in revenue, unanticipated costs, or correction of mistakes in earlier calculations. At the team level, each season’s salary cap is adjusted for things like teams paying out bonuses that were deemed “not likely to be earned”, or for other reasons.

But, how big a change are we likely to see for each team in the 2021 salary cap?

For this question, I turned to OverTheCap, who recently did a pretty good analysis of this very question. The OTC article doesn’t focus on the complete cancellation of the 2020 season; rather, they address themselves to “some type of shortened season where they pick up camp in the fall and start the year in late October or early November. Perhaps a full season with no spectators or very limited spectators (say 1/3 capacity).”

[M]y guess is that you are looking at the cap to drop anywhere from $40 million from projections to $85 million from projections for 2021. This would assume that 2021 growth remains steady pace from where 2020 was expected to be. We had projected a cap of about $215 million in 2021 based on players share increasing from 47 to 48% so anywhere from $130 million to $175 million. $130 million is where the NFL was in 2014 to give some context to it.

The higher number would result in about 14 teams projecting to be over the salary cap in 2021 and that doesn’t include rookies from this year since none are signed yet, so probably half the NFL. The big number would see all but four teams over the cap and really is not even workable.

This conclusion followed about 2,000 words of pretty densely packed explanation, and the guys at OTC are good with numbers, so I’m taking them at face value — if the NFL has a season, but one significantly and adversely affected by the COVID-19 pandemic, then the salary cap would drop to an untenable level.

By way of specific example, the Redskins are currently projected to have salary cap obligations of roughly $137m in 2021 ($123.5 without Alex Smith), but that is only for 41 players (40 without Alex Smith), and that number includes guys like Jordan Veasy and Jester Weah.

Teams wouldn’t likely be able to handle the kind of salary cap numbers that are suggested by the OTC article above ($130m - $175m).

But, after reaching these numbers based on objective analysis, OTC moves from objective analysis to informed speculation near the end of the article, and suggests that if the league and union find themselves in this situation, they could likely reach some sort of compromise (the article uses the technical term, “wiggle room”) involving “borrowing” salary cap from future years to help normalize the 2021 salary cap to some degree. I could see this happening in conjunction with a salary cap freeze in future years until the money “borrowed” for the 2021 season had been “paid back”.

A simplified illustration

As an example, say the 2021 salary cap, due to lost revenues, was calculated at $150m per team. The owners and players might agree to set the cap at $200m for the ‘21 season, and freeze it there until the $50m in “borrowed” cap space is repaid.

To finish the example, say the 2022 cap was calculated as $220m, then the cap would be frozen at $200m, and $20m would be “repaid”.

If the 2023 cap was then calculated as $234m, then the remaining $30m would be “repaid”, and the salary cap for the ‘23 season would be $204m.

Under this simple system, the 2024 salary cap might jump by $40m or more, so the actual agreement may be much more refined than this simple example.

Amazingly, though, this is far from the worst-case scenario. The worst-case would involve the complete cancellation of the NFL season, leading to a loss of both broadcast and local revenue. Again, the league had over $15 billion in revenues in 2019, so we are talking about incredible amounts of money riding on the season being played.

What if the 2020 season were cancelled?

I can’t really address this in a truly meaningful way; partly because I’m not smart enough, partly because it would take an entire book, not a blog article, to address, and partly because there’s just no precedent to look to for clear direction. If the season ends up being cancelled, a lot of high-priced lawyers will start earning their money.

But, after spitballing one or two ideas, I’ve got a thought to throw at you.

Here’s my thought — I don’t think owners will willingly cut checks for over $200m each for a season that’s not being played. I believe they will do what they can to mitigate the impact of a cancelled season. As a result, a lot of players who don’t have guarantees in place for the 2020 season could suddenly find themselves unwilling free agents.

Remember, this isn’t a matter of owners increasing profit by not paying players — the players’ share of the revenue belongs to the players under the CBA, and the owners can’t pocket it.

Instead, the point is that some teams might see a competitive advantage in minimizing the amount paid out in the non-season of 2020 in order to maximize the amount that franchise has available for the 2021 roster.

Over the Cap offered some thoughts on this potential outcome:

[A]s teams become more aware of this season’s outcome, they will likely begin cutting veterans with non guaranteed contracts left and right to cut down on costs for the year and to maximize cap carryover for 2021. Almost every team in the NFL has already met the spending threshold for the current four year spending period so they can almost all run like the Dolphins did last season without worry.

But would there really be a reason to carry the player who is going to earn between $3 and $9 million who may be a situational player or one only on the team due to some cap considerations in 2020? Teams keep players sometimes hoping they can get one last year out of them if the cost to cut and cost to keep are close, but you can probably throw all of that out the window if you are expected to lose $100 million on the year and still face a situation next year where you have to make crazy decisions to be cap compliant and to find ways to make up for all the money that was lost in the Covid crisis. Cutting now and saving the salary lessens your losses on the year and increases your cap room the next year assuming the player was a likely cut anyway.

In addition if there is no season there is no reason to even consider paying players in the last year of their contract if their contracts will expire anyway or paying players who are of limited contribution anyway to the team.

If the 2020 season ends up being cancelled, it could become the equivalent of the Great Depression for NFL players, with huge numbers of them rudely and unexpectedly out of work, with no realistic prospects of re-employment before 2021, if ever. NFL careers are short, and the cancellation of the season could end hundreds of them prematurely.

This is not a simple matter of black & white. Contractually, it could be a nightmare filled with arbitration and possibly litigation that could last for a couple of years or more. It’s easy to say that teams make the decision to cut players, but timing becomes critically important.

By way of example, consider Dallas and Dak Prescott for a moment. Right now, Jerry Jones has placed a franchise tag tender on Prescott, worth $31.4m, which Dak hasn’t signed. Let’s say that Prescott signs it this afternoon. Well, then Jones has to pay his QB the money for the 2020 season, whether it is played or not.

But let’s imagine for a moment that Jones has a conference call with the Commissioner and comes away convinced that the NFL season isn’t going to go ahead. Jerruh rescinds the tag immediately, Dak becomes a free agent, and if the 2020 season doesn’t go forward, the $31m stays in Jerry’s salary cap warchest for the future while Prescott stays home playing tiddly-winks and living off of his savings until 2021.

That’s why it’s so important to Roger Goodell to have consistent messaging about the regular season. A shortened season would have an adverse effect, but a cancelled season would be disastrous for the NFL, with ramifications stretching out in every direction, salary cap being just one of them.

To come through this relatively unscathed, the owners and the unions have to be working together in a partnership more than they ever have before. With constructive cooperation, both sides could come out of 2020 with a better, stronger sports league, but without it, things could unravel over the coming months.