On Sports/NFL Free Agency

Pro Football Enters a New Era: What Agents Should Know

By Steve Baker Esq., Agent & Manager – October 1993

Change has been everywhere in 1993-President Clinton ushered in the first baby-boomer Presidency. Sam Malone announced last call on “Cheers” and Nolan Ryan pitched his last 100 mph fastball Football was also going through its own growing pains. The National Football league (NFL) accepted a concept that had long ago become the standard in other major sports: unrestricted free agency. And, as with all major changes, it has engendered considerable debate.

Prior to 1993, the NFL was just about the only industry that bound worker to employer even after the worker’s personal services contract had expired. Such all-time great players as Walter Payton (Chicago Bears) and Dan Marino (Miami Dolphins) were never able to freely offer their professional services to any other team. NFL players have long sought the right to be “unrestricted free agents” after their contracts expired.

The players negotiated for that right in a 1993 settlement of several antitrust lawsuits that had been filed against the NFL from 1987 to 1992. This right was then incorporated into a collective bargaining agreement that was adopted by the players recertified union (NFLPA) in the spring of 1993. It will be in effect until March l, 2000.

The agreement incorporates three basic concepts: the second two were created and granted working status largely to insure the granting of the first.

I. Unrestricted free agency for most players after five years (four years beginning 1994).

II. A league-wide salary cap on team payrolls.

III. A different, and lower, salary cap for rookies.

Unrestricted Free Agency

In 1987, the NFLPA set unrestricted free agency as its primary objective in labor management negotiations. Many league executives had argued that players must be bound to their teams or competitive balance would be destroyed. The assumption was that all players would flock to the largest markets, thereby making matchups like Los Angeles vs. Green Bay the equivalent of USC vs. Wisconsin refrigerator Repairman Training College.

The history of free agency in basketball and baseball, where free agency has only promoted competition, belies this argument. In the first year of NFL free agency, the most sought after free agent-former Philadelphia Eagle Reggie White-chose Green Bay, not the larger markets of San Francisco. New York or Washington. D.C.

Under the pre-1993 system, the NFL could designate any 37 players on its roster and those players were restricted to their teams whether or not their contracts had expired. If the contract of a player in this Category had expired, he was allowed to offer his services to another team as a restricted free agent but the compensation his former team could receive (generally two first-round draft choices), combined with the former team’s right of first refusal, made it virtually impossible for a player to switch teams or even receive an offer from another team. Those players who were not on the list of 37 players were unrestricted free agents who could offer their services to any team unencumbered by any claims on or rights to their services the former team might have. As a result, only the lesser players on a team’s roster were ever able to test the market for their services. Frequently, back-up players who were unrestricted were better compensated than superior players who had been restricted.

Under the new system virtually all players whose contracts have expired and who have five years of experience (four years in 1994 and thereafter if the salary cap is in place as discussed below) are free to offer their services to other teams without restriction.

The salaries of NFL players have been profoundly affected by unrestricted free agency. Reggie White signed a deal with the Green Bay Packers that was almost 100% larger than any deal previously inked by an NFL defensive player.

Houston Oilers backup quarterback Cody Carlson negotiated a $3 million per year deal the week before he could become a free agent–the club could not risk losing him so they paid him compensation that had previously been seen by no one but franchise quarterbacks.

The new system creates five classes of players. Class 1-unrestricted free agents-are those mentioned above with five or more years of experience, who can freely offer their services to other teams. Class 2-franchise and transitional players-are those players whose contracts have expired and who also have sufficient seniority to be an unrestricted free agent but are restricted because they have been named a franchise or transition player. These are exemptions from free agency that allow the club to hold on to the rights of some of its best players.

Franchise Player. (Class 2). Each team can designate one player per year either as a franchise player or a transitional player; if the player is designated a franchise player, the team is then obligated to offer that player a one-year non-guaranteed contract at a minimum of the average of the top five players at the player’s position. No other team can offer a contract to that player. This restriction has been one of the most controversial portions of the new system. Only eight of 28 teams exercised this option in 1993.

Transitional Player. (Class 2). If a player is designated as a transitional player, the team retains the right of first refusal on any offer made to the player by another team IF the former team extends a one-year non-guaranteed contract at the average of the top 10 players at the player’s position. In 1993 each team can designate two players as “transitional players.” In 1994 a team may designate one transitional player and thereafter retains only a franchise player exemption, which the team may instead use as a transitional player exemption. In 1999, the last year of the new collective bargaining agreement each team gets both a franchise and transition exemption.

Class 3 Player. Class 3 players are those whose contracts have expired and who have been in the league for at least three years but fewer than five years (four years in 1994 and thereafter). These players are restricted free agents who may offer their services to other teams. But the former team retains the right of first refusal as well as the right to compensation in the form of draft picks from the new team if the former team opts not to exercise its first refusal right. The quality of the draft choices is based on where the player was originally draft ed and the amount of any offer that the former team made to the player when the player’s contract expired.

(Compensation calculation: if a player with three years of experience is offered the greater of $275,000 or a 10% raise, compensation is a draft choice equal to where in the draft the player was originally selected; if the player is offered the greater of a 10% raise or $600,000, compensation is a first round draft choice: if the player is offered the greater of a 10% raise and $800,000, compensation is first round and third-round draft choices. The combination of compensation and first refusal rights tends to “chill” the market for players in this class.)

Class 4 Players. Class 4 players are those whose contract has expired and who have fewer than three years of experience. Such players cannot negotiate with any other team even though their contracts have expired.

Class 5 Players. Class 5 players are players under contract. They cannot negotiate with any other team no matter their seniority or how fairly/unfairly they are paid. They can be fined up to $4,000 a day if they refuse to honor their contract

Those players who fall into classes 2 and 3 are restricted free agents. Their ability to offer their services is directly related to the degree that compensation and right to match rights held by their team “chills” interest in them.

Beating The Chill

In the spring of 1993, many of the top free agents were subjected to a right of first refusal by their teams because they were either in class 2 or class 3. Several astute general managers created ways to sign these free agents away from their former teams by crafting offers that would be difficult for the former team to match. For example, the Indianapolis Colts signed transitional player, Buffalo Bills offensive tackle Will Woolford to an offer sheet that required Woolford’s team to make him the highest paid player on the team. Since the Bills highest paid player (QB Jim Kelly) makes well beyond 81 million more than the Colts highest paid player (QB Jeff George), this clause made it far more burdensome for the Bills to keep Woolford.

Similarly, the Cincinnati Bengals made New York Jets cornerback James Hasty an offer that required him to be the team’s highest salaried player with five or more years of experience. The Jets was only able to match this offer because its highest salaried player. QB Boomer Esiason (a former Bengal) agreed to restructure his deal so that his salary would not hurt the team if it matched Hasty’s offer (Esiason’s remaining compensation was then paid in the form of a bonus). After matching the Bengals’ offer and still being threatened with an arbitration by Hasty, the Jets negotiated a settlement with Hasty where the player was paid less than the Jets would have originally had to pay him under the offer sheet but more than the Bengals would have had to pay him if the Jets had failed to match.

In May of 1993, the NFL negotiated to close this loophole that had become so valuable to restricted free agents. Under the terms of the settlement, the NFL agreed to liberalize the rules relating to franchise players and transitional players in 1993 (requiring that they be offered the average of the top paid players at their position as of May 6 of the free agency year rather than the previous NFL season. and be given some limited movement potential) in exchange for agreeing that the former team must merely match the specifically defined salary terms of any offer made to one of its restricted free agents. Thus the “poison pill” provisions that made it difficult for the former team to match an offer were no longer possible. The elimination of the poison pill makes it much harder for a restricted free agent to get an offer since his best chance of doing so exists if he can convince another team that the former learn will not match the offer that it makes to him. Teams generally do not want to make an offer to a player if they are merely doing the player’s deal for him with the former team.

Among the ways that players can still get offers as restricted free agents are negotiating a one-year deal (the former team might not want to match the offer if it feels it might lose the player in a year), negotiating a provision like a guarantee or a particular kind of incentive bonus that the former team due to club policy might be unwilling to match, or negotiating a payment structure or sum that the former club is unwilling to meet.

Of note, although restricted free agents have had a much tougher time getting teams to make offers than have unrestricted free agents (Dallas Cowboys RB Emmitt Smith and San Francisco 49ers QB Steve Young did not receive any offers from other teams), restricted free agents who do get offers tend to receive ones that are actually higher than they might have received as unrestricted free agents! The reason: the new team needs to make an offer that is high enough to discourage the former team from matching it.

Salary Cap

The quid pro quo for unrestricted free agency was the players’ agreement to be bound by a salary cap. Owners’ two major objections to unrestricted free agency had been that it destroys competitive balance and that it is financially disastrous to the league. By agreeing to be bound by a salary cap, the NFLPA removed any basis that might have existed for the second objection.

The cap is triggered the year after the NFL spends 67% or more of its designated gross revenue (DGR) (basically made up of ticket sales and broadcast revenue) on Player compensation and benefits. The first year that the cap is in place (most likely 1994), it will be set at 64% of the DGR, the second year at 63% and thereafter at 62%-subject to the additional rule that the raw dollars available under the cap do not decrease. For example, if the amount of money available for players’ salaries during the first year that a cap is in place is $30 million, that cap amount will not decrease in the following season even if the owner’s DGR decreases in the following year; if the owner’s DGR increases in the following year-allowing for an increase in the cap-then the cap amount is 63% of the DGR. The following year it would be 62% of the DGR.

Unlike the NBA’s “soft” cap that allows a team to pay its own veteran players whatever it would like without regard for the cap (e.g., if the Chicago Bulls is at its cap it could still pay Michael Jordan whatever his agent negotiates but couldn’t pay New York Knicks center Patrick Ewing, if he were a free agent, even $1), the NFL’s hard cap limits all spending by a team on free agents as well as its own veterans and rookies. Thus, unless revenues increase in the next few years, the ability of teams to sign free agents is likely to be substantially reduced or many players will be cut so that the team can sign free agents. Either way, the payroll structure in the NFL during the next few years will likely become one with a few highly paid veterans and a number of younger players paid far less than they would have received under the former system.

In an effort to maximize their ability to sign free agents in the future, many teams have frontloaded the contracts they have negotiated with 1993 free agents since there is no cap in 1993.This is in direct contrast to the typical sports contract where a team tries to backload the contract because of the time value of money and the lack of guarantee, among other factors.

When the cap is in place next year, teams can be expected to try to backload deals as well as to negotiate heavily incentive-oriented contracts that do not initially count against the cap. Clubs will also try to negotiate contracts where the player is paid a lower salary if the player is injured (called a supercede) so that fewer cap dollars are used. Clubs can also be expected to try to negotiate long term contracts that limit a player’s ability to become a free agent offering higher short term compensation in exchange for a long term commitment The problem of this approach for the player is that long-term deals rarely stand the test of time.

In contrast the player will be conscious of such factors as maximizing short-term income while having an eye on his long term earning potential. A variety of factors will affect this analysis, including:

1) An analysis of when the player can vest for free agency.

2) An understanding of rules that give clubs some degree of leverage in pushing the negotiation forward.

3) An understanding of the team’s needs, salary structure and future plans.

4) An understanding of the salary cap.

5) An understanding of the player’s unique skills and the team’s (and other teams) need for them.

In analyzing these factors, it can be expected that many veterans will re-do their contracts this year in an effort to best coordinate their needs and goals with the NFL’s new system.

Effects of Rookie salary Cap

The NFL teams wanted to spend less money on rookies and the NFLPA, having agreed to a hard salary cap, wanted to be sure that the majority of the league’s income was spent on veterans. The result was an agreement to restrict rookie salaries to 3.5% of DGR (an average of the money spent on the first eight rounds of the NFL draft during the last three years. This amount in 1993 is $56 million, or approximately $2 million per team).

The result of this cap has been a drastic reduction in rookie compensation. As of June 1993, only two first-rounders had signed contracts and both were for amounts below that received by their fellow first-rounder from 1992. The dynamics of a rookie negotiation for players taken late in the draft substantially changed as players’ leverage was drastically decreased by the pressure to sign before a team ran out of rookie money to spend and incentives became more difficult to acquire because of cap limitations. Even if players used the leverage of not signing and re-entering the draft the following year, they would still be restricted by the rookie wage limits.

Even though a $2-million-per-team cap is quite restrictive, a larger income can be negotiated. In fact, with creativity, it is actually possible to negotiate a deal that is superior to those negotiated in previous years. For example, if a star taken in the first round negotiated a six-year deal with $1 million paid in each year and a $3 million signing bonus, the player would receive $4 million in year one but it would only count $1.5 million against the team’s rookie cap ($1 million first-year salary + prorated signing bonus: $3 million/6 = $0.5 million).

The problem with such a deal is it could leave a college star substantially underpaid if he becomes a pro star since a six-year deal would entail a much longer wait for unrestricted free agency. Care must be taken to assure that the rookie is not severely undercompensated when he becomes a veteran. The ideal would be to negotiate a long-term deal with a large signing bonus together with a clause that eliminates the last few years of the contract if the player achieves certain minimum playtime or performance goals. This way the player receives maximum compensation without mortgaging his future earning power.

Other devices to diminish the negative effect of the cap and develop a superior deal include negotiating a short-term deal, backloading the contract and negotiating incentives that the player can achieve but do not qualify as “likely to be earned” and the therefore are not credited against the rookie cap. As in all other sports negotiations, the key is for the negotiator to not only calculate the present market value of the client but to also be fully aware of the client’s potential future value.

Reactions Vary

Reactions to the new NFL deal have been varied. Supporters say, among other things, that the deal creates the first true NFL system of unrestricted free agency and provides for a greater share of revenue to players than provided in basketball or baseball. Supporters also indicate that pursuing the players’ antitrust case in court was extremely risky given the antitrust precedents available on appeal and could have resulted in a settlement with much less than this settlement provides, that NFL profits will now go to veterans rather than unproven rookies, that unrestricted free agency comes to players in football more quickly than in baseball (six years) and that the deal creates much more of a partnership between owners and players. Finally, supporters argue that the deal benefits all involved in the sport because the sport will have its financial house in order through the end of the century.

Opponents of the deal claim that: free agency is restricted far more in football than in baseball or basketball even though playing careers are much shorter in the NFL the players gave up too much after significant antitrust victories in the fall of 1992: the hard cap will make it next to impossible for free agents to move in the coming years: benefits are not enough given the much shorter careers football players have in contrast to baseball and basketball players; top rookies who may never negotiate another professional contract are hurt by the new system; top teams will not be able to keep their players (teams such as the Washington Redskins and the 49ers are expected to be over the cap as soon as it is implemented); and many players might actually make less than they were making under the old system

The debate is sure to rage until the next president redecorates the oval office, the producers of “Cheers” run out of sequels, and after Nolan Ryan’s plaque is firmly bolted to the walls of Cooperstown. Whatever opinion one may hold, doing business in the NFL will never be the same.

Steve Baker is a leading sports attorney who has negotiated player contracts in football, baseball and basketball. Recently a number of NFL rookies have utilized the procedures discussed herein.