How Bird Rights Work

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By February 1983, the financial health of the NBA was in serious doubt.

The majority of the league’s 23 teams were losing money. Six – the Cleveland Cavaliers, Denver Nuggets, Indiana Pacers, Kansas City Kings, San Diego Clippers, Utah Jazz – were on the verge of financial collapse. Some, including the Clippers and Kings, nearly provoked a player strike in 1982 as they fell behind on their deferred payments to former players, as the league totaled an estimated $80 million to $90 million in deferred money owed to players.

The NBA’s previous Collective Bargaining Agreement had expired on June 1, 1982.

Seeking relief from skyrocketing player salaries, the NBA was pushing the players union for sweeping changes.

It was proposing to guarantee the players a fixed percentage of league revenues, the first revenue-sharing plan of its kind in team sports. Under the plan, the owners were offering 40 percent of gross revenues up to $250 million, and 30 percent of revenues above $250 million.

In return, management wanted a hard cap placed on each team’s player payroll. The cap would reflect the fixed percentage of league revenues.

At the time, there were no caps or floors on team payrolls, which ranged from the $1.1 million that the Pacers were spending annually on their players to the $4.5 million spent by the champion Philadelphia 76ers.

The union was open to a fixed-percentage plan in concept. It would give them access not to gate revenues but also to the potential growth from lucrative new network and cable television contracts. It was pushing for the players to receive 55 percent of the league’s gross revenues.

Negotiations had been dragging on for eight months. More than half of the 1982-83 season had been played without a new deal in place. The players, frustrated with the lack of progress, imposed an April 2 strike deadline. If an agreement could not be reached by then, they would refuse to finish playing the season. The regular season was to end on April 17, and was followed by playoffs on which the league counted heavily for its revenues.

The primary stumbling block was not the split of league-generated revenues – the NBA had over the course of numerous bargaining sessions increased its proposal to an even 50-50 split, leaving just a five point spread from the players’ 55 percent demand, which it too had indicated was negotiable – but rather the immediate imposition of a first ever modern day salary cap in professional sports. 

The league was not willing to accept a hard cap on spending, certainly not until after the 1986-87 season, when the Oscar Robertson antitrust settlement expired.

In 1970, as then-president of the players union, Robertson had filed suit against the NBA contending that option clauses and compensation rules restricting player movements violated antitrust laws. At the time, all NBA contracts contained options clauses which allowed member teams to add one year to a player’s standard term of contract (provided that 100 percent of the player’s compensation for the last year of his contract was offered). When a player completed his contract (including any option year) and signed with a new team, his new team would be obligated to compensate his old team for the loss of the player.

The suit was settled in 1976, when the league struck down the mandatory option clauses (to take effect after the 1975-76 season) and compensation rules (to take effect after the 1980-81 season) and, starting with the 1981-82 season and lasting through the 1986-87 season, a player who has completed his contract would be free to negotiate with any other NBA team subject only to a right of first refusal. The right of first refusal enabled such free agents to negotiate with every team in the league and then present their best offer to their former clubs. The former club had 15 days to match the offer or allow the player to leave.

The owners’ plan would effectively mean that a team that had a payroll above the salary cap would not be permitted to sign free agents. The plan would thus modify the Robertson agreement, in that it would restrict the mobility of free agents. The union was initially adamant that players be able to retain their free agency.

But in reversal of a stance that marked months of collective bargaining, the union ultimately agreed to let management impose payroll caps on each team in exchange for the establishment of a minimum team salary. The minimum team salary would provide more parity, because all 23 teams would be required to spend significant dollars on payroll. By extension, it would allow many more teams to bid for free agents. Only about six or so teams had traditionally dominated the free agent bidding.

The concession paved the way for a broader settlement.

On March 31, 1983, just two days before the strike deadline, the NBA and its players reached agreement in principle on a groundbreaking new four-year pact that would radically and forever alter the way the NBA does business with its players. The new Collective Bargaining Agreement was officially executed between the parties on April 18, 1983.

The contract would go into effect with the start of the following season (1983-84), but the salary cap, in which the players were to receive 53 percent of the league’s gross revenues, would become effective starting with the 1984-85 season.

Starting in 1984-85, each of the NBA’s 23 teams were to be required to spend a minimum of $3.6 million on player salaries, with the figure rising to $3.8 million in 1985-86 and $4.0 million in 1986-87.

The salary cap would be equal to the greater of the minimum team salary and a calculated figure equal to 53 percent of the league’s projected gross revenues divided by the 23 teams in the league.

The salary cap, however, would not be a hard cap on spending. Instead, it would contain a few exceptions that would allow teams to exceed the cap under certain circumstances:

  • A team could exceed the cap to enter into contract with its draft selections, but only for a term of one-year and only at the minimum salary (which was to be $75,000 in any of those three years).
  • A team could exceed the cap to replace any player who is waived, retired or injured players at 50 percent of what the player being replaced was earning.
  • A team could exceed the cap to replace a player who is traded, or a veteran free agent who is not re-signed at a salary of up to what the player being replaced was earning.
  • A team could exceed the cap to re-sign their own player, or to exercise their right of first refusal to match a free agent’s offer sheet.

The latter exception would be officially termed the “Qualifying Veteran Free Agent” exception, but would be come to be known colloquially as the “Larry Bird exception” (and any player who qualified for the exception would come be known as having “Bird rights”), presumably because the exception was negotiated for with the Celtics’ star player’s upcoming free agency in mind.

The implementation of the first modern day salary cap – which would limit soaring player salaries – was to be a critical cost control victory for the league, while the effect of the exceptions and minimum team salaries – which would enhance free agent movement – was to be a critical victory for the players.

The first year of the four-year Collective Bargaining Agreement, 1983-84, was to remain uncapped before the $3.6 million cap would take effect for the 1984-85 season.

Five of the league’s 23 teams had team salaries which were already over $3.6 million by the end of the 1982-83 season — the Philadelphia 76ers ($5.4 million), Los Angeles Lakers ($5.2 million), New York Knicks ($4.6 million), Seattle Supersonics ($4.6 million) and New Jersey Nets ($3.8 million). These teams had their team salaries immediately frozen at their existing levels (though they could still enter into one-year contracts at the $75,000 minimum salary with their draft choices) for the 1983-84 season. These teams would be able maintain their players’ existing contracts, and would be able to replace the salaries of any players whose contracts had expired (either by re-signing them or other free agents from around the league). Starting with the 1984-85 season, their salary cap level would not be the $3.6 million league-wide figure but rather their payroll level from the prior season, from which point they would be eligible to utilize their exceptions.

 

For the other 18 of the league’s 23 teams, the new cap rules meant sharp payroll increases when the radical changes were to begin in two seasons. Requiring each team to be competitive in bidding for players and in spending money was thought to greatly enhance the possibility of equality of talent and play. But it also opened a temporary loophole that would be exploited by the Boston Celtics.

The 18 teams which had team salaries below $3.6 million at the time the new Collective Bargaining Agreement was executed were not restricted from spending in any way for the 1983-84 season. For each of these teams, the salary cap which was to take effect starting with the 1984-85 season was to be set at the greater of their payrolls at the end of the 1983-84 season and the established $3.6 million figure, from which point they would be eligible to utilize their exceptions.

But in a bizarre application of the rules, setting the cap for these 18 teams at the greater of $3.6 million and what they spent on payroll at the end of the 1983-84 actually encouraged them to spend to spend as much as possible in the summer of 1983, in that it could potentially increase their cap figures for the following year(s), to the extent that their payrolls were higher than the calculated amounts. These teams effectively had free reign on spending during the summer of 1983, giving them a huge advantage over the the five hard-capped teams.

The Celtics leveraged the one-year loophole to attack the hard-capped Knicks.

To begin the summer of 1983, the Knicks dangled a three-year, $3.6 million offer sheet to Celtics free agent forward Kevin McHale. The move precipitated a war with an unhappy Celtics team, which responding by attempting to jack up the Knicks’ payroll with offer sheets of its own to Knicks free agent guard Rory Sparrow (four-years, $2.0 million), forward Sly Williams (three-years, $1.35 million) and center Marvin Webster (three-years, $1.35 million).

The Celtics knew the Knicks felt Sparrow was their second most valuable player after Bernard King, and would match their offer sheet to keep Sparrow even though it was for far more than they would have paid him on their own. The Celtics were trying to push the hard-capped Knicks’ payroll so high that they wouldn’t be permitted to sign McHale.

It worked. The Knicks matched the offer sheets on all three of their players (thereafter dealing Williams and $250K in cash to the Atlanta Hawks in exchange for Rudy Maklin), effectively eliminating their ability to sign McHale.

On July 22, 1983, the Celtics signed McHale to a four-year, $4.0 million contract (not counting undisclosed deferred payments), briefly making him the team’s highest-paid player.

On September 28, 1983, the Celtics then signed Larry Bird to a historic contract – seven years, $12.6 million!

The contract was signed a year before the salary cap and its related exceptions (including the the Larry Bird exception) took effect, meaning Bird was ultimately not signed with the exception which bore his name!

The Celtics’ deals with Bird and McHale, added to contracts with other current players such as Robert Parish, Dennis Johnson, Cedric Maxwell and Danny Ainge, put the Celtics well over $5 million in salary to just those six players, all before the $3.6 million salary cap ever went into effect.

After the 1983-84 season (which ended with the Celtics winning the NBA championship), with their higher salary cap now locked in, the Celtics re-signed one of their own free agents, Cedric Maxwell, to a lucrative contract extension. Maxwell would become the first NBA player to be signed using the so-called “Larry Bird exception.”

And that is how “Bird rights” came to be.

The exception would prove to be a dramatic turning point for the league, allowing superstar players such as Bird, Magic Johnson, Michael Jordan remain with their teams for the entirety of their careers.

The exception still exists today.

However, creative accounting would open several loopholes in its implementation.

One major flaw was that simply by manipulating the timing of the signing of free agents, teams could circumvent the cap rules in unintended ways. Teams with cap room could sign all the free agents they want (up to the salary cap) and THEN exceed the cap to re-sign its own free agents using the Bird exception.

This flaw was addressed with the introduction of “free agent amounts,” or “cap holds.” Cap holds are placeholder charges against team salary for a team’s own free agents. They are designed to protect against a team from using all of its cap space to sign outside free agents and then circling back to its own free agents to exceed the cap in signing them to contracts that utilize their Bird rights. A team’s ability to do this is now very limited — only to the extent a player’s first year salary would exceed his cap hold.

The amount of the cap hold depends upon several factors, including the player’s previous salary and what kind of free agent he is. Cap holds for players on minimum salary contracts are equal to the minimum salary for the upcoming season, but for most other players are generally between 150% and 300% of their previous salary.

The cap holds can be released in order to free up the cap space, but it comes at a cost. To release such cap holds, a team can either re-sign the free agent, at which point his cap hold is replaced with his new salary, or renounce him, at which point his team forfeits his Bird rights.

A second major flaw was that teams could sign players to excessively small one-year contracts, with the promise to give them a substantial raises the following season utilizing their Bird rights. This flaw was exposed when in 1994-95, Chris Dudley of the Portland Trailblazers and Danny Manning of the Phoenix Suns both signed one-year deals with their respective teams at small salaries, and the next year, Bird rights in hand, signed new contracts for far in excess of the cap.

This concept was addressed in the 1995 collective bargaining agreement, with the implementation of a three-year waiting period before a player could attain his full Bird rights. Bird rights were bifurcated into three forms: players who had been with their prior teams for one year could only utilize the exception to sign for up to 120 percent of their previous salary, players who had been with their prior teams for two years (or if more than one team, changed teams only by means of a trade) could only utilize the exception to sign for up to the greater of 175 percent of their previous salary or 108 percent of the average player salary in the previous season, and players who had been with their prior teams for at least three years (or if more than one team, changed teams only by means of a trade) could utilize the exception to sign for any amount.

The rules regarding Bird rights remain in effect today largely as detailed in 1995 (with the noted exception that the salaries players who had been with their prior team for three years was limited from any amount to the maximum salary, when the maximum salary rules were introduced as part of the 1999 collective bargaining agreement).

“Bird rights” represent the most widely used exception to the salary cap still to this day.

The three tiers of Bird rights work as follows:

Larry Bird Exception

Free agents who qualify for this exception are called “Qualifying Veteran Free Agents.”

In essence, the Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at any amount up to the maximum salary. To qualify as a Bird free agent, a player must have played three seasons without changing teams as a free agent, and must have completed his final contract without having been waived. This means that a player can obtain “Bird rights” by playing under three one-year contracts, a single contract of at least three years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him.

The exception also gives the home team an advantage when it comes to re-signing its own players. The starting salary is the same no matter where the player signs, but, by utilizing Bird rights, the home team can offer one more year (six, instead of five) and bigger raises (10.5% of the first year salary, instead of 8.0%).

Early Bird Exception

This is the lesser form of the Larry Bird Exception. Free agents who qualify for this exception are called “Early Qualifying Veteran Free Agents.”

In essence, the Early Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at any amount up either 175% of his salary the previous season, or 108% of the the NBA’s average salary, whichever is greater. To qualify as an Early Bird free agent, a player must have played two seasons without have changed teams as a free agent, and must have completed his final contract without having been waived. This means that a player can obtain “Early Bird rights” by playing under two rest-of year contracts, two one-year contracts, a single contract of two years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Early Bird exception to re-sign him.

Early Bird contracts must be at least two seasons in length (which limits this exception’s usefulness — it’s often better to take a lower salary for one more season and then have the full Bird exception available the next season) and no longer than five seasons. A player can receive raises up to 10.5% of the salary in the first season of the contract using this exception.

Non-Bird Exception

This is an even weaker for the Larry Bird exception. Its name is somewhat confusing, since Non-Bird really is a form of Bird rights. Players who qualify for this exception are called “Non-Qualifying Veteran Free Agents.”

They are veteran free agents who are neither qualifying veteran free agents nor early qualifying veteran free agents, either because (i) they have played only one season without being changing teams as a free agent, (ii) they were Early Bird free agents but their team renounced its right to use the Early Bird exception to re-sign the player, or (iii) they were to be Larry Bird or Early Bird free agents, were playing on one-year contracts, and were traded mid-season (for which the player must give his consent).

This exception allows teams to exceed the salary cap to re-sign their own free agents to a salary starting at up to 120% of the player’s salary in the previous season, 120% of the minimum salary, or the amount needed to tender a qualifying offer (if the player is a restricted free agent), whichever is greater.

Non-Bird contracts are limited to five seasons, and raises are limited to 8% of the salary in the first year of the contract.

***

Dwyane Wade, LeBron James, and Chris Bosh will each have full Larry Bird rights this summer. They will each have a starting salary of $16.6 million no matter where they sign, but their incumbent teams can offer one more year (six instead of five) and bigger raises (10.5% instead of 8%). This translates to an offer of $125.5 million over six years, versus the $96.1 million over five years that other teams can offer.

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