A federal Judge from the Northern District of California has ruled that California state law protects the ability of sports agencies to enforce fee-sharing provisions in the contracts they have with sports agents, who have left the agency, when the provisions pertain to relationships the agents established with clients when they worked for the agency.
But California Business and Professions Code Section 16600, which voids provisions in “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” does not allow for such fee-sharing provisions when it comes to client relationships established after the agent has left the agency.
Plaintiffs Doug Hendrickson and Cliff LaBoy, Jr. are professional sports agents who represent NFL players. Of relevance, here, both men worked for Octagon, Inc., a sports agency and defendant in the case. Two years ago, they left Octagon to join Relativity Sports, LLC. Hendrickson and LaBoy ultimately sued, seeking, among other things, to get out of their fee-sharing arrangements with Octagon, claiming the provisions unlawfully restrain trade under California law.
In the instant opinion, the court described how the process between agent and player works. It noted that just because a player signs a multi-million contract with a team, the player does not receive his money up front. Rather, it is paid out in installments. The agent, too, receives his or her commission in installments.
“Consider Russell Wilson, the former third-round pick. who has taken the Seattle Seahawks to two Super Bowls,” wrote the court. “In 2015, Wilson signed a four-year contract extension that, after a $31 million signing bonus, will pay the quarterback $12.3 million in 2016, $12.6 million in 2017, $15.5 million in 2018, and $17 million in 2019. So, if Wilson’s NFLPA standard representation agreement set a three-percent fee, his agent would get $309,000 in 2016, $378,000 in 2017, $465,000 in 2018, and $510,000 in 2019 — on top of the $930,000 paid at signing. That means Wilson’s agent would not earn his full $2,652,000 fee until 2019, over four years after signing.
“And not all players are Russell Wilson. Some college stars flame-out, others get hurt, and still others retire in their prime. Time and money often go to waste. To hedge against these risks, many agents work for a firm that takes the hit on bad investments and guarantees a salary in exchange for a share of the agent’s fees. Employment agreements between agent and firm govern these relationships.”
The court went on to describe the provisions in the plaintiffs’ employee agreements, which require that both Hendrickson and LaBoy pay Octagon portions of the fees they earn from player-team contracts even after leaving the firm.
“The agreements use somewhat different mechanisms to do the same two things,” wrote the court. “First, the agreements require Hendrickson and LaBoy to share fees from player contracts signed or negotiated while they worked at Octagon. Hendrickson keeps half of these fees but LaBoy keeps none. Second, the agreements require Hendrickson and LaBoy to share fees from contracts signed or, in LaBoy’s case, negotiated during the ‘Restricted Period.’ Hendrickson’s ‘Restricted Period’ lasts one year after his departure. LaBoy’s lasts two. Both agents take home higher and higher percentages of these fees over time.” This violates Section 16600, they claim.
The court found that the fee-sharing contract provision passed muster when it came to client relationships established while the agent was at the agency. “The fees were owed the moment their clients signed with an NFL team,” wrote the court.
The plaintiffs found traction, however, when it came to whether they had to fork over portions of fees they earned from client contracts signed during their “Restricted Periods.”
“Consider again Russell Wilson,” wrote the court, noting how he fell in the draft and received a modest contract before achieving stardom and putting himself in line for a more substantial contract. “Players like Wilson are why firms like Octagon (and Relativity) need fee-sharing arrangements that cover contracts signed even after agents have left. Without them, agents taking after Oliver Wendell Holmes’s proverbial ‘bad man’ could hit the jackpot simply by quitting at the right time. Cf. Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 459 (1897) (‘A man who cares nothing for an ethical rule which is believed and practiced by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money . . . .’). But firms can only front costs and guarantee six-figure salaries because they expect lucrative future returns from at least a few of their agents’ many clients. So here, too, fee-sharing is a hedge against rent-seeking, not a restraint on trade.
“Far from being nefarious, these arrangements prevent the agents from snookering Octagon out of the returns on its most lucrative investments. They exist because firms like Octagon (and Relativity) expect agents to move around. … Agents are free to go and incur no penalty for doing so. Thus, as long as the fee-sharing arrangements do not extend beyond protecting returns from bona fide firm investments, they pass muster under Section 16600.”
The court noted that fee-sharing arrangements are important for the business.
Without them, “agents could earn a guaranteed salary — while the firm bears the risk — and then capture all of the returns from successful clients by quitting at the right time. They could even hedge against players deciding to stay with someone else at their old firm by renegotiating for a lower fee. Green-lighting such behavior would doom firms like Octagon. And it may, quite karmically, force agents into the Wild West of solo practitionership.
“The more difficult question is whether fee-sharing arrangements may cover fees from players who Hendrickson and LaBoy did not themselves represent while at Octagon. Paragraph 6(a) of Hendrickson’s agreement covers not just (i) Octagon clients ‘with whom [Hendrickson] was involved’ but also (ii) any player who was an Octagon client during the six months before Hendrickson left, as well as (iii) ‘prospective clients’ that Hendrickson or Octagon actively solicited during that time. Paragraph 6(c)(2)(b)-(c) of LaBoy’s agreement covers contracts for which LaBoy was the ‘agent of record’ not just while he was at Octagon, but also after he left.
“Ultimately, these provisions do not pass muster under Section 16600 insofar as they extend beyond clients Hendrickson and LaBoy personally represented while at Octagon. Agents cannot cut and run with clients they do not have. In a world without fee sharing, Russell Wilson’s agent could indeed strike gold by quitting before the quarterback signed his mega-deal. But another agent at his firm could not. He would have to quit and hope Wilson fired his current agent to hire him instead. In other words, he would have to compete — successfully to boot. Octagon may not impinge on Hendrickson’s and LaBoy’s freedom to do the same. Accordingly, Paragraphs 6(a) and 6(b) of Hendrickson’s agreement and Paragraph 6(c)(2)(b)-(c) of LaBoy’s are enforceable — but only to the extent they apply to fees from players that the agents themselves represented while at Octagon.”
Douglas Hendrickson v. Octagon INC, Clifford LaBoy JR. v. Octagon INC; N.D. Cal.; Nos. 14-cv-01416 CRB,14-cv-01417 CRB, 2016 U.S. Dist. LEXIS 167722; 12/2/16
Attorneys of Record: (for plaintiff) Roland Michael Juarez, Esq., LEAD ATTORNEY, Mariana Leigh Aguilar, Hunton & Williams LLP, Los Angeles, CA; Yeongyo Anna Suh, Hunton and Williams LLP, San Francisco, CA. (for defendant) Maria C. Rodriguez, LEAD ATTORNEY, Katharine Joan Liao, Michelle Sara Kunihiro, DLA Piper LLP (US), Los Angeles, CA.