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What can you learn from the N.B.A.’s contract fail?

The NY Times has reported that the N.B.A. is close to reaching a settlement to get out of an unfavorable deal it had reached with the owners of one of the A.B.A. teams in the 1970s.  The deal has allegedly cost the N.B.A. $300 million to date and the purported settlement is likely to include a lump sum payment of $500 million.

 

The original deal ended up being very expensive for the N.B.A. for three, primary reasons: (1) the value of what the N.B.A. agreed to pay in the original deal increased exponentially over the years; (2) the deal was written to continue “in perpetuity”; and (3) the original deal did not consider new markets or new technology and how they would affect the value of the original deal. This trifecta of problems has led the N.B.A. to offer a large, lump sum payment to be done with the deal and to be able to fashion a new agreement that takes away some of the sting of the original deal, according to the report by the NY Times.

 

1. Be sure to include language in your contract to cover any new technology that may be developed during the term of the contract. No, you do not need to clairvoyant. You can simply limit the agreement to cover technology that already exists and specifically exclude newly-developed technology from the current agreement. You can include a provision providing that the parties will agree to negotiate in good faith to work out a deal to cover new technology. Barring a new agreement, the parties can agree ahead of time to enter into binding arbitration to determine the terms of the deal as it relates to any new technology. In short, there are ways to address the unknown in a contract. It is when business owners (even ones represented by attorneys) fail to address the unknown that the parties end up with bad deals and, potentially, litigation.

 

2. Think twice before you agree to a perpetual contract term. A perpetual term adds unnecessary and undesirable uncertainty to a contract. Instead, do the work to determine a reasonable contract term, including, if necessary, a balloon payment in lieu of a perpetual term.

 

3. A larger lump payment upfront is almost always preferable to an agreement that requires you to make smaller payments over a longer term, especially if that term is uncertain.