What Was the Most Profitable Contractual Loophole in History?


What was the biggest contractual loophole in history?

Steve Berman:

Ozzie and Daniel Silna owned a basketball team called the St. Louis Spirits, in the old American Basketball Association (ABA). You remember, they used to play with the red, white, and blue balls instead of the orange ones everyone else uses.

When the NBA and ABA merged in 1976, four teams were invited to be part of the NBA: the New York (now Brooklyn) Nets, Denver Nuggets, Indiana Pacers, and San Antonio Spurs. That left out two teams, the Spirits and the Kentucky Colonels. The Colonels' owners negotiated a $3 million buyout, and the Silnas accepted a $2.2 million payout, with a 2 percent share of TV revenues from the other four ABA teams.

The catch: The TV revenues were in perpetuity. As in forever.

When basketball wasn't on TV, nobody ever thought a 2 percent share of four teams would amount to much. Then in the '80s and '90s the NBA became white hot, and every year the Silnas would get tens of millions. By 2014, over $300 million had been paid.

How did this happen? From "Best sports deal ever? How the Silnas outsmarted the NBA," by Jon Wertheim in Sports Illustrated:

All first-year law students worth their highlighters know the danger of contracts without termination periods. The NBA's outside counsel—including a young lawyer, David Stern—saw this and tried to indemnify the league from disputes that might arise from the contract.

[The Silna's attorney Donald] Schupak countered with a masterstroke: He inserted an intentionally broad definition of broadcast revenues, a clause that could one day make the contract applicable to distribution channels unimaginable in 1976. "I was blunt during these discussions," Schupak wrote in a 2012 legal declaration. "Rather than narrow the definition of TV revenues, I insisted instead that we add a new sentence [to] emphasize that this was a broad definition that could not be evaded or made obsolete."

When League Pass and foreign broadcast rights entered the picture, the Silnas sued for their share, and the league finally had to deal with the issue once and for all.

The Silnas got $500 million, plus a continuing share of media revenue from a partnership with the Nets, Nuggets, and Spurs.

In the end, a team that was worth maybe $3 million tops netted over $1 billion to its owners, who are still being paid to do absolutely nothing.

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Banner images via Getty.