The Bizarre Saga of Donatas Motiejunas

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Update (12/15/16):

The Houston Rockets apparently never actually signed Donatas Motiejunas. But whether they did or did not  sign him is irrelevant. In both cases, the Rockets could have conditioned the contract (in a case where they didn’t sign him, as a condition to offering the contract; and in a case where they did sign him, as a condition to the validity of the contract in accordance with Exhibit 6) on him passing a physical exam. The Rockets did so condition it, and Motiejunas failed. Which returned him to restricted free agency once again. 

After consultation with the league office to find an amicable solution to a contentious situation, the Rockets have renounced their rights to Motiejunas, making him an unrestricted free agent. He is now free to sign with an team except the Brooklyn Nets, who are prohibited from signing or acquiring him until December 9, 2017. 

Update (12/9/16):

The Houston Rockets and Donatas Motiejunas have agreed to a new contract. The Rockets’ first refusal exercise notice to match the offer sheet Motiejunas signed with the Brooklyn Nets has been withdrawn, and the new deal will presumably be signed shortly.

The new deal will contain the same basic structure as the offer sheet (as detailed herein), including $31 million in base salary, $4 million in likely bonuses and $2 million in unlikely bonuses. It will have a salary cap hit for this season of $9.3 million (equal to his $8.3 million base salary, plus $1 million in likely bonuses).

The primary differences between the new deal and the offer sheet will be that: (i) the guarantee on Motiejunas’ second year salary will get pushed back to July vs. March 1, and (ii) the Rockets will be able to trade Motiejunas without restrictions after the end of the season (i.e., the end of the regular season or, if he’s on the playoff roster, after the Rockets either win the title or are eliminated) vs. being restricted from trading him without his consent for one year.

The lengthy saga, however, is not quite over just yet.

The Rockets could have conditioned the new contract on Motiejunas passing a physical examination (Exhibit 6 to the Uniform Player Contract). The determination would be made in the sole discretion of a physician designated by the Rockets. The exam would need to be completed within three business days of executing the contract (which, if it were executed today, would be by next Wednesday) and the results would need to be reported to Motiejunas within six business days of executing the contract (which, if it were executed today, would be by the following Monday).  If the physician appointed by the Rockets determines that Motiejunas has failed his physical, he would be returned to restricted free agency. 

Whatever happens, the Nets are now officially prohibited from signing or acquiring Motiejunas for one year from the date the first refusal exercise notice was withdrawn (i.e. until December 9, 2017 or thereafter). 

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Donatas Motiejunas is having a tough time navigating the difficult world of restricted free agency.

There are two types of free agency in the NBA: unrestricted and restricted. Both types of free agents are free to re-sign with their prior teams. An unrestricted free agent is free to sign with any other team as well, and there’s nothing his prior team can do to stop it. A restricted free agent can also sign with any other team, but his prior team can retain him by matching the terms of that offer. This is called the “right of first refusal.”

Restricted free agency is allowed only in limited circumstances: For first-round draft picks who complete all four years of their rookie-scale contracts, and for players who have been in the league for three or fewer seasons. Only these players qualify for restricted free agency, and only if their prior teams first submit to them a “qualifying offer” at some point between the day following the completion of the NBA Finals and the subsequent June 30. A qualifying offer is a standing offer of a one-year guaranteed contract, which the player can accept at any time while it remains outstanding.

Motiejunas was the twentieth pick in the first-round of the 2011 NBA draft. After having completed the fourth and final year of his rookie-scale contract in 2015-16, the Houston Rockets tendered a $4.4 million qualifying offer on June 30, 2016. Motiejunas therefore became a restricted free agent this summer. 

Restricted free agency can pose a serious problem for certain players. Many teams shy away from engaging in contract discussions with such players, recognizing that the right of their prior teams to match any contract they execute can make their efforts not only futile but also potentially costly.

When a restricted free agent wants to sign with another team, the player and team sign an “offer sheet,” which the prior team is given three days to match. If the prior team matches the offer sheet within the three-day period, the player is deemed to have entered into a contract with his prior team. If the player’s prior team doesn’t match the offer sheet within the three-day period, the player is deemed to have entered into a contract with his new team.

To extend the offer sheet, the new team must maintain enough room (either cap space or an applicable exception) for the offer sheet from the moment it is signed until the moment the prior team decides whether or not to match it.

Therefore, not only will the team lose the player if the prior team matches the contract, it will also have been forced to wait three days to access the cap room the contract required to pursue other interests.

Motiejunas’ situation this summer was further complicated by his history of back troubles. He underwent a minimally invasive lumbar microdiscectomy surgery in April 2015, and suffered a series of setbacks during his recovery that caused him to miss a substantial portion of the 2015-16 season. In fact, a proposed trade of Motiejunasto Detroit Pistons at the February trade deadline was voided by the Pistons when he failed its physical examination due to complications of his back situation.

The confluence of strenuous restricted free agency rules and his back issues left Motiejunas without an outside suitor this summer. No team was willing to engage in discussions on a contract that would have been strong enough to dissuade the Rockets from matching and simultaneously weak enough to protect itself in the event of a further Motiejunas injury.

His primary options, therefore, were limited to: (i) accepting his $4.4 million qualifying offer and becoming an unrestricted free agent next summer, or (ii) negotiating a contract with the Rockets.

The Rockets reportedly engaged with Motiejunas on such contract discussions. According to Marc Stein of ESPN, they offered Motiejunas a multi-year contract starting at a guaranteed $7 million and potentially increasing into the $8 million range based upon the achievement of certain bonuses. But they made clear during those discussions that they were unwilling to offer a multi-year guarantee. They weren’t willing to bear the economic risk of paying out his contract if he were to sustain a further injury. More importantly, they weren’t willing to lose the salary cap flexibility a multi-year guarantee would require.

Motiejunas, on the other hand, naturally pushed for a multi-year guarantee. Which led to a stalemate. Which dragged on for months.

It dragged on past a key date: October 1. That’s the date when qualifying offers automatically expire. Once a qualifying offer expires, the player can no longer accept it, but he nonetheless remains a restricted free agent. Motiejunas’ debatable decision to let his $4.4 million qualifying offer expire therefore left him with no choice but to pursue a new contract.

It dragged on past another key date: November 23. That’s the last day players could be signed this season and remain eligible to be traded by the league’s annual trade-deadline day(1), which falls on February 23 this season, a key inflection point for the Rockets. With this critical deadline having passed, Houston pulled its offer.

Then, on Friday, the Rockets finally gained some clarity. Five months after he became a restricted free agent, Motiejunas signed an offer sheet with the Brooklyn Nets potentially worth as much as $37 million over four years. Houston would have three days, until Monday at 11:59 pm, to match it.

Motiejunas’ history of back trouble led the Nets to structure the contract with a number of protections against long-term risk.

The uniquely structured deal paid out $31 million in base salary, plus another $6 million in potential bonus money.

The $31 million in base salary broke down as follows: $8.3 million for 2016-17, decreasing to $7.9 million for 2017-18, $7.6 million for 2018-19, and $7.2 million for 2019-20.

As added protection, the $31 million base salary was to be largely non-guaranteed:

  • Of the $8.3 million base salary for 2016-17, only $5.0 million was guaranteed. The remaining $3.3 million was to become guaranteed on January 1 (the date upon which all player salaries around the league become guaranteed for the rest of the season).
  • Of the $7.9 million base salary for 2017-18, none was initially guaranteed. However, the entire $7.9 million was to become fully guaranteed if Motiejunas was not waived by March 1, 2016.
  • Of the $7.6 million base salary for 2018-19, none was initially guaranteed. It was to become guaranteed only if Motiejunas was not waived by the seventh day after moratorium in July 2018.
  • Of the $7.2 million base salary for 2019-20, none was initially guaranteed. It was to become guaranteed only if Motiejunas was not waived by the seventh day after moratorium in July 2019.

The additional $6 million in potential bonus money was to be allocated over the four seasons. According to Bobby Marks of The Vertical, the bonuses were based on Motiejunas reaching certain individual goals, including statistical achievements and conditioning milestones.

The contract was billed as something of a compromise.

For Motiejunas, it provided an atypically early second-season guarantee date. His entire base salary for next season would be guaranteed on March 1 of this season. That’s just three months from now.

For the Nets, it provided a multitude of protections against injury. It also locked in Motiejunas for up to four years, at declining annual payouts. He could be forced to remain under contract until all the way out in 2020 if he were to stay healthy and outperform his smallish salaries.

While waiting for the Rockets to determine his fate, Motiejunas stated that he would be happy no matter what happened.

It seems apparent that when he uttered those words, he wasn’t aware that he, his agent B.J. Armstrong, and the Brooklyn Nets organization had made what appears to be a rather significant oversight in executing the contract (as noted here, in real time).

When a restricted free agent signs an offer sheet with another team, his prior team is not required to match every aspect of it. Instead, it is only required to match the “principal terms.”

The “principal terms” of an offer sheet consist of the following six items:

  • The length of the contract
  • The amount of any signing bonus or deferred compensation
  • Any allowable amendments (e.g., guarantees, trade bonuses, player or team options, etc.)
  • The base salary
  • Certain bonuses to be achieved based upon the individual performance of the player – only those based on the player achieving generally recognizing league honors (including MVP, Finals MVP, Defensive Player of the Year, Sixth Man, Most Improved Player, All-NBA Team, All-Defensive Team, and All-Star selection)
  • Certain bonuses to be achieved based upon the collective performance of the team – only those that would be deemed “likely to be achieved” for both the team executing the offer sheet and the team considering whether to match it. For a bonus to be deemed “likely to be achieved,” it would need to be earned if the team’s performance from the prior season were duplicated for the coming season.

The bonuses are the key here.

The relevant portion of the Collective Bargaining Agreement states this:

“The Principal Terms of an Offer Sheet are only… Incentive Compensation; provided, however, that the only elements of such Incentive Compensation that shall be included in the Principal Terms are the following: (A) bonuses that qualify as Likely Bonuses based upon the performance of the Team extending the Offer Sheet and the ROFR Team; and (B) Generally Recognized League Honors…”

The ONLY bonuses which are principal terms based on a team’s collective performance are therefore those that would be deemed likely for both the prior team and new team — sub-bullet (A) above. Bonuses based on team performance which would be considered unlikely to be achieved for one or both do not need to be matched.

The ONLY bonuses which are principal terms based on a player’s individual performance (whether likely or unlikely) are therefore based on the achievement of generally recognized league honors — sub-bullet (B) above. All other bonuses that are based on a player’s individual performance do not need to be matched.

The language also explicitly excludes from principal terms all other types of “Incentive Compensation” as well, including bonuses which are based on academic/personal achievement and extra promotional activities.

For the Rockets with Motiejunas, that meant the $31 million base salary and the associated guarantees (and guarantee dates) were required to be matched. It also meant his $6 million in bonuses, which were based upon the achievement of individual statistical and conditioning milestones, were not required to be matched.

Why? The $6 million in  bonuses were based on Motiejunas’ individual performance. Therefore, it didn’t matter whether they were considered “likely” or not. The only thing that mattered was whether or not they were based on generally recognized league honors.  They weren’t. So they weren’t principal terms.

Whether or not Motiejunas, Armstrong, or the Nets organization may have misinterpreted the language of the Collective Bargaining Agreement in regard to whether such bonuses would be included as principal terms, that the issue wasn’t caught before the contract was signed remains puzzling. The process of a player and team officially executing an offer sheet involves the drafting of two things: a one page document known as Exhibit G (Offer Sheet), and a Uniform Player Contract which explicitly delineates all the principal terms of the offer.

The Exhibit G, which must be officially executed by both the player and the new team, states the following: “Attached hereto is an unsigned Player Contract that the New Team has offered to the Player and that the Player desires to accept. The attached Player Contract separately specifies in its exhibits those Principal Terms that will be included in the Player Contract with the ROFR Team if that Team gives the Player a timely First Refusal Exercise Notice.”

What remains unclear is what exactly happened.

Was the Uniform Player Contract drafted correctly? If so, how could Motiejunas, Armstrong, and the Nets organization all not recognize that the bonuses were not principal terms? Were the terms of the contract, or the contract itself, ever reviewed by the league office? Did they give confirmation of its validity?

Was the Uniform Player Contract drafted incorrectly? If so, that would explain how Motiejunas, Armstrong, and the Nets organization all did not recognize that the bonuses per not principal terms. But it yields a different set of questions. When the Rockets received the incorrect Uniform Player Contract, how did they proceed? Did they contact the league office to report the error? Did they simply match the offer sheet, after which the league caught the error?

Lots of question still need to be answered as to how it happened. But it did happen. Which caused a significant problem for Motiejunas (and the Nets, if they truly wanted him).

What was a four-year contract worth up to $37 million with the Nets became a four-year contract worth no more than $31 million for the Rockets. Which made it more appealing for them to match.

Houston chose to match the contract on Monday, by issuing a “first refusal exercise notice.” However, in accordance with league rules, they conditioned their first refusal exercise notice on Motiejunas passing a physical examination. Players in such situations are required to report for their physical within two days, and must comply with the process.

Having discovered that Rockets general manager Daryl Morey had essentially wiped away more than 15 percent of the potential value of the contract he signed with the Nets, Motiejunas has refused to report for his physical. The deadline for doing so is today.

Not reporting by the deadline opens up an option.

Before the deadline passes, his only option is to report. The only option for the Rockets is to wait for him to report.

After the deadline passes, the Rockets will have two choices: They can keep their first refusal exercise notice open and wait for Motiejunas to report. Or they can withdraw the offer and return him to restricted free agency. If they don’t pull the offer, it would be automatically withdrawn on March 1.

Further complicating matters for Motiejunas: March 1 is also the last day restricted free agents are eligible to sign offer sheets with other teams.

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What does it all mean?

If the Rockets keep the first refusal exercise notice open (which seems imminently likely, at least to me), Motiejunas will continue to be required to report for his physical. In the meantime, he doesn’t have many options. He can’t sign with any other NBA team. He can’t leave the U.S. and play for a FIBA team overseas (to do so requires him to receive a letter of clearance from the NBA, which he surely wouldn’t get). He can’t even negotiate a contract with another team. And the Rockets can keep it that way all the way through March 1, at which point any shot of him signing a contract with any other team at any point this season would essentially be over.

In short: The Rockets, if they so choose, can force Motiejunas to either: (i) sit out the entire season and return to restricted free agency next summer (the only difference from this season being that he wouldn’t be permitted to sign with the Nets) or (ii) sign with the Rockets.

What are the potential outcomes?

Assuming the Rockets don’t release the first refusal exercise notice (which they have no apparent reason to do), there are four primary outcomes:

  • If Motiejunas reports and fails his physical with the Rockets, his offer sheet becomes a valid contract with the Nets. His contract with Brooklyn would be as he originally signed it – four years and $31 million (potentially less a prorated portion of his base salary for this season to reflect the duration of his hold-out), with another $6 million in potential bonus money which could increase the total to $37 million(2).
  • If Motiejunas reports and passes his physical with the Rockets, the first refusal exercise notice becomes a valid contract with the Rockets. His contract with Houston would be as they matched it – four years and $31 million (potentially less a prorated portion of his base salary for this season to reflect the duration of his hold-out).
  • If Motiejunas doesn’t report, the Rockets could essentially force him to sit out the entire season and return to restricted free agency next summer. Motiejunas wouldn’t get to play. The Rockets wouldn’t get his services.
  • If Motiejunas doesn’t report, the Rockets could agree to negotiate terms for a potential new contract. If the sides are able to agree on a new deal, Houston could then withdraw the first refusal exercise notice and sign the new deal in its place.

Rockets officials are reportedly willing to negotiate a new deal with Motiejunas.

Which makes sense. The Rockets want two things: Motiejunas (who they feel can really help the team) and flexibility (to both trade or waive him at little to no cost if the situation should dictate).

Trade flexibility would be automatically achieved if the Rockets were to sign Motiejunas to a new deal.

If the current offer sheet because a valid contract (which it would if Motiejunas reports), Motiejunas would have veto power over any trade for a full year. By signing him to a new deal, the Rockets have no such restrictions. The only trade restriction he would have, which would apply in either scenario, is a hard restriction from being traded to (or acquired in any way) by the Nets for one year.

Waiver flexibility could be acquired by negotiating the terms of that new deal.

Perhaps the Rockets be willing to concede to a contract that contains not only the $31 million base salary but also the $6 million in bonus money. But, given their substantial leverage, they’d surely want to extract something in exchange. They’d surely to want to push out the March 1 guarantee date for the second-year salary — possibly all the way out to the summer, providing them the flexibility to cut him if they find a better alternative for the money and to keep him if not.

That, ultimately, could be how things end up. Which would be a significant loss for Motiejunas. All because of a bizarre salary cap issue which apparently was overlooked, for reasons that remain unclear.

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Note: The rules of restricted free agency are rumored to be changing in the Collective Bargaining Agreement to come. It is also conceivable that, as a result of this situation, the NBA and players association could take a look at the rules regarding the principal terms of an offer sheet. Perhaps as an extension to Exhibit G, it could lay out the non-principal terms as well.

(1) Teams generally have to keep a player for three months after signing a contract or December 15  (or January 15, if the player is a Larry Bird or Early Bird free agent, re-signs with his prior team, his team is over the cap, and he receives a raise greater than 20 percent in the first season of his contract, and his new salary is greater than the minimum salary), whichever is later. This does not apply to draft picks, who can be traded 30 days after signing. For sign-and-trade transactions, the initial trade which completes the sign-and-trade is allowed; the trade restriction in a sign-and-trade applies to the first subsequent trade. But sign-and-trade transactions are prohibited during the regular season, and prohibited unless the player finished the preceding season on the team’s roster. 

(2) Though it has been reported that the Nets performed a physical on Motiejunas prior to executing the offer sheet, the Nets could have required him to pass another physical as a condition to the validity of the offer sheet. Whether they did, by including an Exhibit 6 to the offer sheet, has yet to be confirmed.

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