The Demise of the Seattle Sonics: The Legal Battle that Relocated a Tradition

I.         Introduction

The city of Seattle lost something the day the Seattle Supersonics (Sonics) professional basketball team was moved to Oklahoma City. Many lamented (and still do) at the fact that the largest city in the Northwestern part of the United States no longer had professional basketball. The departure slashed a gaping hole in the social fabric of the community. Here, I will provide a comprehensive summary of the National Basketball Association (NBA) relocation process, with a particular study of the Seattle Supersonics relocation, examine the legal ramifications of the lawsuits involving the Sonics relocation, and provide a few takeaways from the ordeal. 

            Over the last 20 years, the Vancouver Grizzlies, Charlotte Hornets, and Seattle Sonics have relocated. Why did these teams relocate? NBA teams relocate for a variety of reasons, but most teams relocate because they are not generating enough revenue in the current market. Teams can have low revenue due to poor attendance, lack of community interest, or the absence of a genuine basketball facility that can help turn a profit. The Charlotte Hornets had to move to New Orleans largely in part because they played in an outdated facility and had poor attendance (Foster, 2002). The struggle of the Charlotte Hornets exemplifies how a team can be driven to relocate to a new city. The Sonics had similar problems, primarily in that they had a poor basketball facility (Key Arena). NBA relocations take place when the need to avoid revenue loss becomes too much for the owner to swallow. This is the nature of any business, the NBA is a business, and thus relocations are inevitable. 

II.         The Relocation Process

            A brief overview of the NBA relocation process is important to understand when examining the Sonics departure from Seattle. The NBA relocation process is quite the journey and the process is outlined in the NBA Constitution. Article 9A of the NBA Constitution stipulates that if a team wants to move, then it must submit an application to the NBA Commissioner in writing with an enclosed check of $50,000 just to cover the cost of any possible investigation (Rubanowitz, 1990). The Commissioner would then establish a committee to produce an investigation to discern the reason(s) the team wants to move (Rubanowitz, 1990). The committee would analyze whether the proposed new geographical area is capable of supporting a team, whether it would be a better financial situation, whether the location will have an adverse effect on the ability of the NBA to market, and if the location will make scheduling games difficult (Rubanowitz, 1990). The team must fully cooperate with the committee during its investigation (Rubanowitz, 1990). Within 120 days the committee must make its recommendations to the Board of Governors, a board having a representative from every team (usually the owner), on whether or not the team’s application should be granted (Rubanowitz, 1990). The Board of Governors would then meet no less than seven days and no more than 30 days after being presented with the committee’s findings (Rubanowitz, 1990). A simple majority vote among the Board of Governors is all that is required to approve the relocation (Rubanowitz, 1990).

III.         The Seattle Supersonics and PBC Acquisition

            The Sonics were established in Seattle, Washington in 1967 (Frisch, 2002). They won the NBA championship in 1979 (Frisch, 2002). All franchises have their times of ups and downs, and fluctuation is the nature of sports. The team had successful years in the 1990’s and were poised to make a run to the NBA championship in 1994, but fell to the eighth seeded Denver Nuggets (Frisch, 2002). The era of success soon phased out, but the Sonics were still an important part of the community. One would have been hard-pressed to find a person in the city who thought that the team would be moved in the next decade, in fact it was almost sacrilegious to contrive of such a thought.

            Howard Shultz, the owner of Seattle based Starbucks Coffee, bought the Sonics for approximately $200 million in 2001 (Greenberg, 2008). The team was not terribly successful on the court during his tenure as owner. According to the Sonicsgate Documentary, Shultz ran the organization like a coffee shop, and it failed miserably. Professional Basketball Club (PBC), LLC bought the team from Shultz for $350 million in 2006 (Morris, 2009). PBC was a group of Oklahoma City businessmen led by Clayton Bennett. The team played in the lackluster Key Arena, which was a major factor that caused economic loss for the franchise. In 2008, ownership claimed the Sonics would lose $60 million over the next two seasons if they were forced to play in Seattle (Brunner, 2008).

A contributing factor to the loss in revenue and fan engagement for the Sonics could be attributed to majority owner Bennett, which created a figurative rain cloud over the team (Brunner, 2008). The community was not interested in investing money in a team that was owned by Bennett. His ownership, contributed to this negative image of the team, resulting in more loss of revenue. In fact, the Sonics CEO, Danny Barth, said, “The fan apathy and our brand recognition, . . . has been very difficult.” When he was asked to explain where this apathy was stemming from he said, "Individuals obviously have a problem with the fact of our ownership group and their being from Oklahoma. The apathy towards that has been very strong." The fans were disinterested in paying money for a lame duck season and to an owner who had ulterior motives to relocate the franchise from Seattle. 

As with any business transaction, conditions and agreements are central bargaining chips to the sale of a franchise. In the case of the Sonics, this was no different. When Shultz sold the team to Bennett and his group, he sold it to them under the impression that Bennett would utilize a good faith effort to do all he could to keep the team in Seattle (Greenberg, 2008). The term “good faith” is defined as “a state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage”(Garner, 1996). Bennett had a fiduciary duty “use good faith best efforts” to keep the team in Seattle (Brunner, 2008).

IV.         The Breakdown

Bennett and his ownership group were contractually obligated to “use good faith best efforts” to keep the team in Seattle. In reality, this would entail ownership engaging fan confidence, managing the team correctly, and maintaining a good working relationship with the city to get an arena built. Bennett failed to do all of the above.

a.     Engaging Fan Confidence and Poor Team Management

As stated earlier, many fans did not trust the owner and were suspicious of his ties to Oklahoma City. In fact, the owners intentionally limited exposure of Sonic players to the public (Rudman, 2008). For example, Kevin Durant had limited public appearances to the community. Furthermore, many of Sonics top stars, such as Ray Allen and Rashard Lewis were either traded or let go in free agency, resulting in further fan mistrust and suspicion as the losses continued to mount. While these issues may seem minor, they are useful factors in discerning the true intentions of the ownership group.

b.    Failure to Build an Arena: A Debacle From the Beginning

The plan to build a new sport facility to replace Key Arena was bad from the beginning. Soon after Bennett purchased the team in 2006 he proclaimed, “Key Arena is not a viable NBA arena. A renovated Key Arena is not a viable NBA arena. We cannot stay in the Key Arena” (Greenberg, 2008). It was well known by many that Key Arena was not profitable, and a new facility would be needed for sustainability. In February of 2007, Bennett proposed to build a new facility in Renton, Washington for approximately $530 million, $300 million of which would be subsidized by taxpayers (Rudman 2008).                  

                                

The appropriations from public funding would come from the passage of Senate Bill 5986 (Greenberg, 2008). Senate Bill 5986, in essence, would have extended or increased taxes to help pay off new arenas in the state (Greenberg, 2008). Bennett first took his proposal to the city of Seattle. However, Initiative 91 stipulated a minimum return to taxpayers from the construction of a new stadium (Greenberg, 2008). Of course, there was no guarantee of a return, and it failed at the municipal level. Bennett then took his proposal to the Washington Legislature.

The proposal drew heavy criticism from the Seattle community, which was a reason the Washington Legislature decided not to pass funding. Many thought Bennett should put up more money for the project (Reid, 2009). The price of the facility seemed way over the top, and it did not seem like he was acting pragmatically on getting the arena built. Additionally, the location was poorly chosen. Representative Ross Hunter, the House Finance Committee Chair for the Washington Congress, said, “There was a proposal to build the most expensive arena in the NBA at the worst traffic intersection in the state of Washington” (Reid, 2009). Hunter said that when Bennett sat in his office, he was not serious about getting an arena passed and that he sat in silence as the lobbyist did all the talking (Reid, 2009). When Bennett’s attempt at the state level failed, he set an October 31^st deadline for an arena solution to be reached, and if one had not been reached by then he would file intent to seek relocation (Johns et al., 2007). In March of 2008, Microsoft CEO Jeffrey Ballmer put up $300 million of his own money to help renovate Key Arena, but it was to no avail, as the city could not guarantee the rest of the money (Morris, 2009). Bennett then filed his intent to relocate. The Board of Governors approved the move in 2008. This lead to a string of lawsuits, and the attempt to build a suitable NBA facility in Seattle was abandoned by ownership.

V.         Discovery Reveals Intentions

A year prior to Bennett filing the intent to relocate, the City Council unanimously passed an ordinance compelling the Sonics to honor its lease with Key Arena through 2010 (Rudman, 2008). In 2007, Bennett filed for arbitration arguing the Sonics should not be compelled to stay in Key Arena through 2010 (Rudman, 2008). Tom Carr, the city attorney for Seattle, sued Bennett arguing the Sonics needed to honor its lease with Key Arena until 2010 (Rudman, 2008). Ultimately, the city avoided arbitration and ended up in court challenging Bennet’s assertion in The City of Seattle v. Professional Basketball Club LLC. Former Sonic player Gary Payton joined thousands of fans outside the courthouse during the trial to show his support to keep the Sonics in town (Morris, 2009).                                       

The city argued the new ownership group signed an Instrument of Assumption when they bought the team (Anderson, 2011). This means they had to “assume, and hereby agrees to satisfy or perform (as applicable), all liabilities and obligations. . . under the lease agreement” for Key Arena (Anderson, 2011). Carr argued the new owners assumed the responsibilities of the previous owners upon acquiring the team, and Bennett’s fiduciary duties were inconsistent with the actions he was taking (City…, 2007). Carr stated Bennett was in violation of the lease and the agreement to fulfill it when he filed for arbitration to get out of the lease early. The city referenced Article II of the lease agreement, which stipulated the Sonics play their games exclusively in Key Arena and that arbitration could not be used to get out of the lease prematurely (Anderson, 2011). The city sought to invoke specific performance as the remedy, hoping to force the team to play the remaining two years in Key Arena (Anderson, 2011). The judge was to issue a ruling on July 2, 2008.

            In April of 2008, Schultz filed suit against Bennett to rescind the sale of the team (Rudman, 2008). Shultz had reason to believe Bennett had failed to “use good faith best efforts” to keep the team in Seattle (Morris, 2009). This belief was based on the discovered materials from The City of Seattle v. Professional Basketball Club LLC case.  Dialogue among owners in the PBC indicated they never intended to honor a best effort to keep the team from moving. In February 2008, the Court compelled the PBC to turn over all of their emails and correspondences for trial (City of Seattle v. The Professional Basketball Club, LLC, 2008). Aubrey McClendon, a former partner in the ownership group, told the Oklahoma City Journal in 2007 that they had no intention of ever keeping the team in Seattle when they bought them (Allen, 2007). The NBA issued a $250,000 fine to McClendon for the comments (Allen, 2007). In fact, in April of 2007, e-mail correspondences between, Sonics minority owner Tom Ward asked Bennett, "Is there any way to move here for next season or are we doomed to have another lame duck season in Seattle?" and Bennett replied, "I am a man possessed! Will do everything we can…” (Bennett, Clay & Ward, Tom, personal communication, April 1, 2007).

The correspondences discovered in the lawsuit, along with the poor effort to get a new facility built, served as the basis for Shultz's lawsuit that Bennett was not operating in good faith. However, Robert Buchanan, the Executive Vice President and General Counsel of the NBA, referred to the “Release and Indemnification” in a court written document which stipulated that former owners were prevented from taking future legal action that could disrupt the management of a newly acquired team (Buchanan, 2008). Shultz would go on to drop the lawsuit as a result of the NBA’s intervention.           

As it turned out, Schultz was the city’s last hope to save the Sonics because on July 2, two hours before the judge was supposed to issue the ruling on the Key Arena lease, the city and the team settled. Many fans wonder what the ruling would have been and they thought the city gave up and let the Sonics walk away to Oklahoma City. The Memorandum of Understanding (MOU) that was agreed to among Seattle and PBC compelled Bennett to pay the city $45 million in exchange for a termination of the lease, let the Sonics move to Oklahoma City immediately, and make PBC pay an additional $30 million to the city if they had not secured a new franchise on the 5^th anniversary of the MOU’s enactment (Bennett & Carr, 2008). The NBA has made it clear that there are no promises to Seattle to get another team in the area.

VI.         The Questions Remains

            Revisionist history often leads to more questions than it does answers, and this case study is no different. Two important questions and one important lesson stem from this case study.

1.     What would have happened had Shultz not dropped his lawsuit? Its plausible that the court could have believed that the contract was breached materially and that the sale of the team should have been rescinded, although, not likely. Shultz most likely dropped this case for good reason, because even had there been a breach of good faith, it would be hard to calculate how material the breach was and it would not likely have been enough to rescind the sale of the team.

2.     What would have happened had the city of Seattle not settled the case with PBC? It is possible that the city could have kept the team in the lease for two more seasons, which would have been a good thing considering that team would have had players like Kevin Durant and Russell Westbrook.. Time is a valuable resource and it is something we never get back. If specific performance would have been granted, then Seattle would have had two more seasons of professional basketball, and it would have been more difficult for PBC to move the team.

3.     Always beware of what you put in a contract and who you sell to. Shultz should have placed a covenant in the agreement that the team had to be in Seattle for a certain amount of time. I am not naïve and understand that Bennett would not have bought the team if such a covenant were in the agreement. However, one must be aware that contracts will generally be construed in a manner that is against the drafter when it comes to ambiguous terms. Good faith and best efforts is vague and Shultz should have insisted on a better standard by which to judge Bennett’s actions. At the very least, Shultz could have found another buyer to keep the team in Seattle.

The Sonics played professional basketball in Seattle for 41 years and were entangled in the social fabric of the community. Clayton Bennett bought the team and moved them to Oklahoma City. Many felt Bennett did not comply with the good faith covenant in the purchase-sale agreement. The circumstantial evidence tends to point toward a concerted effort by the PBC to move the team to Oklahoma City from the beginning. If Bennett’s intention existed from the beginning, then it would have been all but impossible to square that intention with the covenant to “use good faith best efforts” to keep the team in Seattle. Nobody will ever know Court’s ruling. Shultz, the city, and the fans fought hard for their team, but it was futile. Skepticism among Bennett’s intentions to keep the team in Seattle will always be high, and fans will always ask; was he really giving his best effort to keep the Sonics in Seattle?           

        

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