HLB_Fall2005_6259

Credit: Rick Zaidan

For Peter Carfagna ’79, negotiation is a professional sport–and he’s been in the zone

Arnold Palmer and Tiger Woods have both spun their mastery of golf into millions of dollars in endorsements.

But Palmer, who negotiated his early deals over informal lunches and sealed them with a handshake, might be perplexed by the sheer weight of a Tiger Woods contract. In fact, he could use a caddy just to lift one.

Peter Carfagna ’79 has represented both legends over the course of a career in sports law spanning 25 years, much of it as general counsel at Cleveland-based International Management Group, one of the nation’s leading sports marketing and representation firms.

In that time, Carfagna has witnessed the transformation of sports negotiation from a fledgling field marked by simple agreements and modest sums into a sophisticated specialty involving highly detailed contracts worth hundreds of millions of dollars, with clauses covering every imaginable contingency.

“When I came out of law school, sports law was mainly just a small part of labor law,” Carfagna said. “Now it’s an increasingly competitive set of specialties, and it’s morphing fast into new areas.”

Peter Carfagna

Credit: Rick Zaidan Peter Carfagna owns the Lake County (Ohio) Captains, the Cleveland Indians’ Class A farm team.

The term “sports law,” once a rubric for rather straightforward employment contracts between professional athletes and teams, now encompasses an expanding variety of negotiated agreements. According to Professor Paul Weiler LL.M. ’65, who supervised Carfagna’s third-year paper in 1979, it covers sports marketing deals, contracts between players’ unions and leagues, deals between leagues and television or radio networks for broadcast rights, representation agreements between athletes and agents, endorsement agreements, licensing agreements with makers of sports gear and memorabilia, amateur eligibility rules, antitrust issues, insurance policies spreading the risks of player injuries and other eventualities, franchise relocation agreements and stadium subsidies–in sum, contracts for every aspect of the commerce of sports.

Over the past several decades, as the dollar values of sports contracts have busted through one ceiling after another, the stakes have become especially huge for team franchises and corporate sponsors whose investments in athletes are increasingly vulnerable to career-ending injuries or image-tarnishing personal problems.

“When I started out, it was all boilerplate,” Carfagna said. “But the bigger the money, the more heavily negotiated the deal becomes. And I think that’s because the companies have lost huge sums paying promising athletes who then dropped off the face of the earth, whether it be due to physical or psychological problems.”

As risks have multiplied, so have the contingencies that must be anticipated and negotiated. Lawyers like Carfagna try to design contracts that answer every “what if” question under the sun. “Assume the worst,” he said. “Assume, God forbid, a terrorist attack–must the players keep playing? When do their contracts kick in and when do they release them from the obligation to perform?” Carfagna has tackled such questions in his practice, and he also bats them around with students at Case Western Reserve University School of Law, where he is a distinguished visiting practitioner.

A recent trend, Carfagna says, is an almost obsessive attention now paid to morals clauses in sports contracts, especially in the aftermath of the O.J. Simpson and Kobe Bryant criminal cases. “Morals clauses are now the most heavily negotiated terms,” he said. “And the steroid scandal in Major League Baseball is putting even more pressure on sponsors to negotiate escape clauses in contracts with athletes who test positive for illegal performance-enhancing drugs.”

Lawyers hash out as much as they can foresee before a contract is finalized, says Michael McCann LL.M. ’05, who, together with Greg Skidmore ’05, maintains a popular sports law blog, sports-law.blogspot.com. Must an athlete be convicted of a crime before a company will be released from an endorsement contract? If so, must it be a felony? Is a mere allegation or charge sufficient to void a contract? Does a single positive test for steroids give Nike an out? What about gambling, domestic violence, an admitted extramarital affair or anything in an athlete’s private life that does reputational harm–will an allegation or admission release a company from continuing to honor a contract?

“Endorsers want ‘out’ clauses for anything that could be damaging to their reputations when that affinity deal with the athlete is not what they thought it would be,” said Carfagna. “Anybody who has a ‘history’ with drinking, drugs, et cetera–the next time he or she comes up for renewal, that’s got to be front and center. So if it’s, ‘I fell off the wagon,’ you get a cancellation letter the next day: ‘We told you we were going to cancel. We’re canceling.'”

Peter Carfagna owns the Lake County (Ohio) Captains, the Cleveland Indians’ Class A farm team.

The Baltimore Orioles recently invoked the morals clause to void the remainder of the contract of pitcher Sidney Ponson after his third arrest for alcohol-related violations. Ponson had one year left to play under a contract that would have paid him $10 million in 2006.

But in the sports world, as in other areas of contract law, cancellation letters don’t necessarily end the contractual relationship. Sometimes they trigger a new round of negotiations. The decisive factor may be whether the athlete is playing well. “The question becomes, Is he hot right now?” said Carfagna.

The latest twist in the evolution of morals clauses, said McCann, is the “reverse morals clause,” which gives athletes the right to cancel an endorsement deal with a corporation whose reputation is harmed by revelations of corporate malfeasance. Agents have been negotiating such clauses in the wake of Enron and other recent scandals, he says. “I don’t know of an athlete invoking a reverse morals clause yet, but it’s bound to happen,” he added. In addition to running his blog, McCann teaches sports law at Mississippi College School of Law in Jackson.

Hand in hand with morals clauses have come clauses requiring mediation or confidential arbitration in the event of breach. “I pretty much insisted when I was running the legal department at IMG that there’d better be a good reason not to have a mediation clause in an athlete’s contract,” said Carfagna. “And there’d better be a good reason not to have a confidential arbitration clause, because high-profile athletes lose if they’re in court–that’s money lost.”

Some sponsors fight confidential arbitration clauses because they want the option of publicly distancing themselves from athletes who violate morals clauses. “That in and of itself is another negotiation point–how public can the dropping of an endorsement be?” Carfagna said.

Carfagna’s gravitation to sports law seems to have been natural. After playing football for Harvard College and capping his academic and athletic accomplishments with a Rhodes Scholarship, the self-described “sports nut” attended Harvard Law School just when Weiler was showing that sports law was a subject of serious merit. After graduating, Carfagna practiced law at Jones Day in Cleveland, where he worked frequently on IMG matters. He paid his dues writing up some of the informal understandings that Arnold Palmer had reached with Mark McCormack, IMG’s founder. He moved to IMG’s legal department in 1994.

In 1996, Carfagna found himself drafting Tiger Woods’ first representation agreement. Woods, then a junior at Stanford, was trying to decide whether to join the professional golf circuit.

“The drafting of that agreement had to be very carefully done so as not to impinge upon his amateur eligibility,” he recalled. “It was unclear when he won his third amateur title whether he could or should turn pro. We had a back-to-back agreement with Nike if he decided to come out. But he couldn’t commit to those things, couldn’t be represented, if he was going to remain amateur eligible. And yet the main thing he needed to know was, How much can I make if I turn pro?”

Lawyers in that situation learn to walk a tightrope, says Carfagna, to line up prospective deals but make sure the deals don’t add up to mutual guarantees or commitments that mean, in effect, that the athlete has already crossed the line. “The way the NCAA rules break out, the player can’t have any contact with the agent. But the agent can be in the living room while the kid’s in the kitchen. Without losing his eligibility, that college kid can be asking, through his parents, if he comes out, where is he likely to be drafted, and if he’s drafted in that spot, what is he likely to be paid?”

The answer to that last question depends on a host of variables, which sports lawyers and marketing firms must be able to calculate and communicate quickly to an athlete, since athletes are often in a hurry to seal their deals. Deals hinge on the kinds of guarantees that agents can round up from companies willing to pay for endorsements.

Carfagna recently left IMG to become senior counsel at Calfee, Halter & Griswold LLP in Cleveland. And, in the last five years, he and his family have bought two minor league baseball teams–Class A affiliates of the Cleveland Indians and the Seattle Mariners. The rosters for his clubs are picked by their major league parent organizations, so he doesn’t negotiate player contracts. But if he ever steps up to ownership of a major league franchise, he’ll know more about negotiating player contracts than most owners. “Maybe,” he said, “it would be like having a bit of a home-field advantage.”

 

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The Weiler Effect
6258Peter Carfagna is just one of many former students of Professor Paul Weiler's who have carved out careers specializing in sports negotiation. Among those who wrote third-year papers under Weiler are Jeffrey Pash '80, general counsel for the National Football League; Rob Manfred '83, head of labor relations for Major League Baseball; and Brian Burke '81, who oversaw labor relations for the National Hockey League before becoming president and general manager of the Vancouver Canucks and now general manager of the Anaheim Mighty Ducks.

Pash, Manfred and Burke are scheduled to return to HLS this spring, as guest lecturers in the law school's Sports and the Law course.