Loyola of Los Angeles Entertainment Law Review Volume 17 Number 3 Symposium—Using Law and Identity Article 11 to Script Cultural Production 3-1-1997 An Alternative Approach to the Problem of Midterm Demands for Contract Renegotiation in the National Football League: The Incentive-Based Contract Daniel M. Walanka Follow this and additional works at: https://digitalcommons.lmu.edu/elr Part of the Law Commons Recommended Citation Daniel M. Walanka, An Alternative Approach to the Problem of Midterm Demands for Contract Renegotiation in the National Football League: The Incentive-Based Contract, 17 Loy. L.A. Ent. L. Rev. 771 (1997). Available at: https://digitalcommons.lmu.edu/elr/vol17/iss3/11 This Notes and Comments is brought to you for free and open access by the Law Reviews at Digital Commons @ Loyola Marymount University and Loyola Law School. It has been accepted for inclusion in Loyola of Los Angeles Entertainment Law Review by an authorized administrator of Digital Commons@Loyola Marymount University and Loyola Law School. For more information, please contact [email protected]. AN ALTERNATIVE APPROACH TO THE PROBLEM OF MIDTERM DEMANDS FOR CONTRACT RENEGOTIATION IN THE NATIONAL FOOTBALL LEAGUE: THE INCENTIVE-BASED CONTRACT I. INTRODUCTION In this day of the multipurpose, multiyear, and multimillion dollar contract, the average football fan marvels at how much National Football League ("NFL") players earn to hit the gridiron. As a result of these lucrative contracts, it is only natural for fans to develop certain expectations as to the quality and consistency of the product displayed throughout the grueling seventeen-week regular season and the ensuing playoffs. These expectations go unfulfilled when players strike, either collectively or individually. This Comment addresses the specific situation in which a player, in the middle of his contract term, demands renegotiation. When popular players hold out due to a demand for contract renegotiation, not only are the fans deprived of watching their favorite players perform, but many also sense a degree of unfairness. How can a player sign a four-year contract and, after playing well for two years, demand a better, more lucrative contract? Surely, it would not be fair for an architect, who contracted to build a four-story building for $4 million, to threaten to walk off the job after completing the first two floors unless the owner promised to pay an additional $2 million.' A basic interpretation of contract law reveals that such a midterm demand for contract renegotiation might constitute a breach of contract. For example, two parties form a contract, during the term of which, one of the parties demands a better deal, effectively holding the other hostage in order to improve the bargain. This Comment contends that all concerned parties are harmed in some way by this midterm demand for contract renegotiation. The controversy harms the athlete who does not perform, the team that loses a player, and the fans who have spent large sums of I. See E. ALLEN FARNSWORTH, CONTRACTS, § 4.21, at 287 (2d ed. 1982); see also infra Part IV.B.I. In fact, such a demand may be permissible if prompted by the discovery of unanticipated circumstances. RESTATEMENT (SECOND) OF CONTRACTS § 89 (1981). 772 LOYOLA OF LOS ANGELES ENTERTAINMENT LA WJOURNAL [Vol. 17 money on tickets, concessions, and parking to watch their favorite players perform. The end result is an arguably inferior NFL product. When a player breaches his contract by demanding a midterm renegotiation and withholding performance, traditional contract remedies require court action. 2 These remedies, however, are either inefficient, ineffective, or cumbersome because the team wants the player on the field immediately while the player is steadfast in his demand for more money. Thus, a solution that ends the stalemate without delay is required to satisfy both parties. This Comment proposes an alternative to the traditional remedies for dealing with a demand for a midterm contract renegotiation: the incentive- based contract ("IBC"). In its simplest form, the IBC is a contract a team can offer its disgruntled player that is based primarily on the player's on- field performance. An IBC provides the player with the league's minimum base salary and then adds performance incentives. Thus, the better a player performs statistically, the more he will be compensated. Conversely, he is paid less for a poor performance. This system improves upon the fairness of the typical contract renegotiation because with an IBC, both parties take a risk by renegotiating. In the standard renegotiation scenario, the player receives more money and a longer contract term.3 The player is paid regardless of his performance. 4 Although the team always has the option of cutting the player, that option is not realistically available when the player is of the stature of Jerry Rice, Brett Favre, or Emmitt Smith.5 In other words, when a team agrees to renegotiate a superstar's contract, it is forced to accept the risk that the player may not meet all expectations. Both parties assume a degree of risk with the IBC. If the player performs beyond expectations, he will be compensated accordingly; if the player performs below expectations, he is paid less. The team therefore avoids the frustrating situation in which a player has two or three exceptional years, obtains a renegotiated contract that pays him at a level commensurate with the league's elite, and then flounders in mediocrity. With the IBC, everyone has the chance to win. This type of contract potentially compensates the player at the level commensurate with his 2. See Alex M. Johnson, Jr., The Argument for Self-Help Specific Performance: Opportunistic Renegotiation of Player Contracts, 22 CONN. L. REv. 61, 77-92 (1989) (discussing traditional remedies such as affirmative and negative injunctions and constructive trusts). 3. Id. at 94. 4. Id. at 117. 5. Such players are indispensable not only to the team's on-field success but also to the team's ability to generate revenue. 1997] THE INCENTIVE-BASED CONTRACT accomplishments, ensures that the team receives the player's on-field performance, and delivers to the fans top-level NFL excitement. Part II of this Comment discusses the fundamental principles of contract law implicated by a midterm demand for a renegotiated contract. Part III reviews the historical evolution of the player-owner relationship in the NFL, focusing on the state of the NFL today, specifically the NFL's hard salary cap and its implications for the IBC. Part IV examines the components of a typical NFL contract, including the absence of guarantees and the use of deferred compensation and escalator clauses. Part V analyzes the current state of contractual negotiations in the NFL by focusing on holdouts, demands for midterm renegotiations, and the problem of "one-year wonders." Part VI presents the IBC, compares it to the typical NFL contract today, and applies it to a recent midterm demand for renegotiation. Part VI also addresses the problems of drafting bonus and incentive provisions. Part VII discusses the viability and the potential disadvantages of implementing the IBC into a NFL player contract. Finally, this Comment concludes that the introduction of the IBC into the NFL may have the indirect effect of diminishing the frequency of midterm demands for renegotiation. II. IMPLICATIONS OF CONTRACT LAW ON THE IBC When a player demands renegotiation, various contract law principles are implicated, such as consideration, the pre-existing duty rule, and the law of modification of executory contracts. Therefore, before the IBC can be presented and analyzed, it is important to address how the law of contracts affects the viability of the IBC in the NFL. A. The Problem of Consideration 6 One of the fundamental components of any contract is consideration. to the team by In the case of a renegotiated contract, consideration given 7 the player is normally in the form of an extension of the contract period. This extension will fulfill any of the additional requirements raised in contract law.8 However, because the IBC does not necessarily extend the 6. RESTATEMENT (SECOND) OF CONTRACTS § 71 (1981). "To constitute consideration, a performance or a return promise must be bargained for." Id. § 71(1). 7. Johnson, supra note 2, at 94. 8. For a complete explanation of the preexisting duty rule, see infra Part i1.B; see also RESTATEMENT (SECOND) OF CONTRACTS § 89 (1981). 774 LOYOLA OF LOS ANGELES ENTERTAINMENT LA WJOURNAL [Vol. 17 length of the player's commitment to the team, the contract may have9 to provide some other form of consideration to be a valid modification. The consideration supporting an IBC is the contract's risk allocation to both the player and the team, a matter bargained for between the two. The team risks that the player will perform beyond expectations and be entitled to collect a huge salary. On the other hand, the player risks that he will have an off-season and earn a smaller salary. Do these mutual risks adequately constitute valid consideration? It is a well-recognized principle of contract law that courts will not examine the adequacy of consideration.10 Restatement (Second) of Contracts, section 79 expressly provides that "[i]f the requirement of consideration is met [i.e., bargained for mutual inducement], there is no additional requirement of ... equivalence in the values exchanged.'11 The rationale underlying section 79 is that, in many contracting situations, "there is no reliable external standard of value."' 2 Therefore, the courts defer to the judgment of the private, contracting parties to determine the value of the consideration, as they are more qualified to evaluate the circumstances of particular transactions.13 This difference is particularly applicable when one or both of the values exchanged are difficult to quantify.