2000 Words Case Study see attachments below E du ca tio na l m at er ia l s up pl ie d by T he C as e C en tr e C op yr ig ht e nc od

see attachments below

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9 – 9 0 6 – 0 3 8
R E V : M A R C H 0 4 , 2 0 0 6

________________________________________________________________________________________________________________

Professor Deepak Malhotra and Maly Hout (MBA Candidate 2006) prepared this case. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.

D E E P A K M A L H O T R A

M A L Y H O U T

Negotiating on Thin Ice:
The 2004–2005 NHL Dispute (A)

Introduction

National Hockey League veteran player Trevor Linden was gearing up for another face-off. But
this time, he was not wearing his skates and helmet; he was wearing a business suit. And, instead of
walking onto the ice, clutching his hockey stick, he was walking into yet another union meeting,
clutching his briefcase. The irony of the situation was not lost on Trevor: his toughest and most
consequential of battles had not lasted three periods in a skating rink, but five months in negotiations
with the National Hockey League. And now, as the “game” went into overtime, he was unsure which
side would prevail.

At issue was the negotiation of a new collective bargaining agreement (CBA) between the players,
represented by the National Hockey League Players’ Association (NHLPA), and the team owners,
represented by the National Hockey League (NHL). The CBA provided the basic framework for
players’ salary contracts, and was the keystone for agreements on a wide array of issues, including
salary arbitration, free agency, and guaranteed contracts.

The CBA had been renegotiated many times before, but this time was different. The league,
insistent on cutting costs and curtailing the growth of players’ salaries, was resolute on two key
issues: 1) the introduction of a salary cap, which would establish a limit on player salaries, and 2) the
linkage of salary to revenues, such that league-wide salaries would not exceed a fixed percentage of
league-wide revenues. Meanwhile, the players adamantly opposed both proposals. As a result, this
negotiation had been longer, more acrimonious, and less productive than any in the past.

The previous CBA had expired on September 15, 2004. Since the two sides had failed to negotiate
a new CBA by that date, NHL Commissioner Gary Bettman locked out the players.a This meant that
no hockey would be played, no revenues would be collected, and no salaries would be paid. This was
no idle threat, and it was not taken idly. With the lockout in effect, 150 NHL players promptly joined
European hockey clubs1, sports arenas began finding other sources of revenue, and the Canadian
Broadcasting Corporation (CBC) replaced “Hockey Night in Canada” with “Movie Night in Canada”.

a A lockout is initiated by owners; it forcibly suspends salary payments by halting operations. A strike, in contrast, is initiated
by players; it forcibly halts operations through a collective refusal to work. In this case, it was the owners that had decided not
to start the season until a new CBA was signed.

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All rights reserved e info.usa@thecasecentre.org e info@thecasecentre.orgcase centre

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906-038 Negotiating on Thin Ice: The 2004–2005 NHL Lockout (A)

2

Meanwhile, millions of hockey fans turned their attention to other professional sports. The start date
for the 2004–2005 NHL season—October 13, 2004—came, and went.

Months of negotiations had produced only rejected offers. Now, in mid-February 2005, Union
President Linden wondered what lay in store for the players he represented and for the sport he
loved. The union had flexed its muscles in the past—and won—numerous times. Could they pull it
off one more time? With almost half the season already lost, and the rest of the season on the verge of
being cancelled, which side had the power to hold out longer, or to negotiate a more favorable CBA?

Background on the NHL

Professional hockey came onto the ice in the 1900s, and the National Hockey League was
established in Montreal in November 1917.2 The league, now headquartered in New York, was the
official body representing the collective interests of the NHL team owners. The league’s
responsibilities included operational and administrative tasks such as setting game rules, scheduling
seasons, selling national television rights and, of course, negotiating the CBA with the NHLPA.

The NHL Board of Governors oversaw the league, but most of the operations were carried out
under the supervision of the Board-elected NHL Commissioner. The NHL Commissioner worked on
behalf of the 30 NHL teams across Canada and the United States. (See Exhibit 1 for the structure of
the NHL, and Exhibit 2 for a list of NHL teams.) Teams were typically owned privately or by large
corporations, (e.g., Comcast owns the Flyers).

While each team had only six players (five skaters and one goal tender) on the ice at any time
during the game, each team was required to have between 20 and 23 players on its roster (with up to
3 goal tenders) and up to 50 on its reserve list.3 Each team played 82 regular season games from
October to mid-April. The playoffs ran from mid-April to early June, and culminated with the
Stanley Cup Finals which were “broadcast to more than 150 countries, from Albania to Zimbabwe,
and watched in more than 300 million homes”.4

At the end of each hockey season, the league required all teams to report their financial
performance by preparing a Unified Report of Operations (URO). The URO included all hockey-
related revenues and expenses, and was designed to standardize financial reporting methods in order
for the league to compile league-wide financial results. The league’s reporting of its financial results
has been a point of contention throughout the NHL’s history.

During the early years of the NHL’s existence, the players accused team owners of concealing
actual revenues and underreporting the profitability of the game.5 The players received only league-
wide information, and perceived a difference between observable revenues (e.g., sum of ticket sales,
concession and parking revenues) and the reported revenues of teams. Consequently, the players
believed that the league reported financial data selectively, and that each team’s idiosyncratic method
of reporting revenues disguised actual performance. Meanwhile, team owners were unwilling to
engage in any debate regarding the players’ mistrust of their reporting, contending that teams were
private enterprises, and thus not obligated to disclose any financial information.6 According to team
owners, players should simply be grateful for making two to three times more than the average
person, staying at the best hotels, and being role-models to boys young and old.7 The situation
worsened until 1967, when the players banded together to create a players’ union: the NHLPA.

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Negotiating on Thin Ice: The 2004–2005 NHL Lockout (A) 906-038

3

Background on the NHLPA

From 1917 to 1967, players had no collective bargaining rights and few options when it came to
playing professional hockey—the number of NHL teams was limited, growing from five to six
during this entire periodb.8 Consequently, team owners were able to negotiate highly favorable
contracts. Money was not the only problem facing players. The game was also incredibly rough and it
was not uncommon to see a player with blood running down his face, cracked teeth, a broken nose,
or a bruised shoulder. This was not surprising: there were no rules requiring goalies to wear
facemasks, nor for players to wear helmets.c In addition to risking physical injury, players endured
significant verbal abuse from team owners, who did it partly to conjure up a sense of aggression for
games and partly to cement players’ feebleness in their relationship. Unsurprisingly, the relationship
between players and team owners was marked with hostility and distrust in the early years.

The first significant step towards unionization came in 1957, when Detroit Red Wing’s team
captain and nine-time All Star, Terrible” Ted Lindsay, brought in New York Lawyer Milton Mound
to establish a players’ union. However, it would be another 10 years before the union was founded,
as team owners did everything possible to prevent unionization.9 Most effective was their
punishment of players who led the charge in creating a union. For his unionization efforts, Lindsay
was immediately demoted as Detroit’s Captain, transferred to Chicago (considered the NHL
equivalent of Siberia at the time), and portrayed in the media by team owners as greedy.10 Under
intense pressure from team owners to disband, the initial group of union organizers dissolved.
However, in 1967, under the leadership of Toronto Maple Leafs’ Bob Pulford, a new, more sizable
and unified group of players emerged and was successful in establishing the NHLPA. It was not long
before the union was successful in negotiating higher salaries, increased benefits, and the adoption of
a salary arbitration process.

Headquartered in Toronto, Ontario, Canada, the NHLPA was founded as the labor union
representing NHL players’ interests. The players had power over all NHLPA activities. The players
annually elected representatives from their respective NHL teams to form an Executive Board. This
board was overseen by an Executive Committee, which was comprised of the Union President and
five to six Vice-Presidents. (See Exhibit 3 for the structure of the NHLPA.) The Executive Board and
Executive Committee were largely comprised of veteran players.

By the 2003–2004 season, the union’s negotiating team was working on behalf of over 700 NHL
players, who automatically became members of the union when they joined the NHL.11 These players
hailed from 23 different countries, but over half of them came from Canada.12 (See Exhibit 4 for NHL
player breakdown by nationality.) As a result of the NHLPA’s success, most of these players were
well compensated for their work. According to the league’s reporting, more than 400 of the current
NHL players would make over $10 million during their careersd.13 Superstar players could earn as
much as $50 to $70 million during their careers.14

b The “original six” teams included the Boston Bruins, Chicago Blackhawks, Detroit Red Wings, Montreal Canadiens, New
York Rangers and Toronto Maple Leafs.

c Such rules were adopted only after players were unionized. Goalies were required to wear facemasks starting in
1973, and players entering the league were required to wear helmets starting in 1979.

d The average hockey player’s career lasted five to six years.

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906-038 Negotiating on Thin Ice: The 2004–2005 NHL Lockout (A)

4

Head-to-Head

The 2004-2005 CBA negotiations were conducted by the NHL Commissioner (on behalf of the
league) and the NHLPA’s Executive Director (on behalf of the union). The current NHL
Commissioner, Gary Bettman, began his tenure on February 1, 1993.15 During his tenure, the league
grew from 24 to 30 franchises, revenues grew from $400 million US to over $1.6 billion US, and
licensing revenues grew by a staggering 700%.16 Bettman also signed TV deals with major American
broadcasters ABC and ESPN, played a major role in changing the rules of the game and, for the first-
time, permitted NHL players to participate in the Olympic Winter Games.17

Although Bettman was successful in reaching out to broadcasters, he was less successful in
establishing a positive rapport with the union. Some of his critics charged that Bettman was “not a
hockey guy”.18 In some obvious ways he was not. He was a New York lawyer and a former senior
executive in the National Basketball Association (NBA). As a result, Bettman was perceived by many
as motivated by money and not by the love of hockey.19

The entire burden of negotiating with the union did not rest on Bettman’s shoulders alone. NHL
Chief Legal Officer, Bill Daly, participated in the negotiation of all major issues. In an otherwise
contentious negotiation, Daly stood out as one with the joint virtues of being well-respected both by
the union and by the league. He was close to Bettman, and could “stroll into Bettman’s office and the
Commissioner [would listen] to every word”.20

On the other side of the table, representing the NHLPA, was Executive Director Bob Goodenow.
Bob Goodenow was elected in 1992 when the previous Executive Director, Alan Eagelson, was
accused of fraud and was forced to step downe. A 1979 graduate of Harvard University, Goodenow
went on to study law at the University of Detroit, and subsequently became a corporate and
commercial lawyer. His days as a hockey player on the Junior Wings and as captain of Harvard’s
hockey team underpinned his interest in hockey. Through hockey friends, he eventually transitioned
into the world of professional hockey, first as an agent, then as deputy to Eagleson, and now as
Executive Director of the NHLPA.

What Bettman did for the NHL, Goodenow did for the NHLPA: he grew the organization and he
delivered results. During his tenure, NHLPA revenues increased 25-fold, and the NHLPA
administration team grew from 2.5 employees to 50 employees.21 He also helped players negotiate
higher salaries; under his leadership, players’ salaries had increased by 240% since 1995.22 Goodenow
was a hands-on leader, and spent much of his time communicating directly with players. He was
always “available to take a player’s phone call” and was well-respected by them.23 His reputation
was that of an energetic, militant advocate of players’ interests. For players who remembered (or
knew of) a past in which they had been pushed around and out-muscled, such leadership was
welcomed.

Goodenow’s top aide in the negotiations was NHLPA Senior Director Ted Saskin. Saskin was
known to be less confrontational than Goodenow and was seen as an effective communicator of the
union’s interests.24 Alongside Goodenow and Saskin stood Union President, and sixteen-year NHL
veteran, Trevor Linden. Linden was elected President in June 1998.25 As President, he was the
primary voice for the NHL players, was involved in planning union strategies, and was responsible
for bringing player demands to union management (i.e., to Goodenow). (See Exhibit 5 for other NHL
individuals at the negotiating table.)

e In January 1998, Eagelson pleaded guilty to defrauding hockey players and the NHL.e As a result, he faced six counts of
fraud, was fined $1 million CDN, and was sentenced to 18 months in jail for his conduct.e

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Negotiating on Thin Ice: The 2004–2005 NHL Lockout (A) 906-038

5

In some ways, Bettman and Goodenow were entering the 2004-2005 negotiations as they had
entered so many other negotiations. There were differences in perspective, differences in interests,
differences in priorities, and differences of opinion. But what made this negotiation more difficult
was not what made Bettman and Goodenow different, but what made them similar. Both of these
men had come into their positions in the early 1990’s. Both had performed incredibly well in their
assigned roles. Both were seen as capable, competent, and caring by their constituents. And both had
the same problem: they were negotiating in the dark shadows of their shared past.

More Money, More Problems

1992 Strike26

Following his election to Executive Director, Goodenow had led the players on their first-ever
strike in NHL history. The principal issue in this negotiation was the players demand for full control
of the marketing rights to their images, (e.g., on trading cards, posters, and other merchandise). As
the sport gained popularity, the value associated with marketing rights grew.

What could have become a long protracted battle over a significant sum of money was in fact
settled quickly. The timing of the strike may have contributed: the strike occurred just before the start
of the season’s playoffs. It lasted only 10 days, from April 1 to 11, 1992.

When the smoke cleared, the players had been given full control over the marketing rights to their
images. In return, they agreed to accept a shorter CBA contract length. Although the players had
originally asked for a three-year contract, they settled on a two-year deal (for the 1991–1992 and
1992–1993 seasons). The collateral damage was minimal: the 30 games that were supposed to be
played during the strike were rescheduled, and four games were added to the regular schedule to
pay for increased league costs. The players were largely regarded as the victors in this negotiation.27

1994–1995 Season Lock Out28

The expiration of the 1991–1993 CBA again resulted in conflict. This time, the issue was the
league’s financial concerns. Although the two sides were unable to agree on a new CBA for the 1993–
1994 season, both sides agreed to continue playing the game under the existing CBA terms by
agreeing to a “no-strike, no-lockout” pledge. One year later, there was still no new CBA. This time,
believing that the economic state of the league was getting progressively worse, Bettman insisted on
signing a new CBA before the 1994–1995 season began. When the two sides were unable to agree on a
new CBA before the season’s start, the NHL locked out the players for the first time in NHL history.

The primary issue in the negotiation was how to help small market teams (those that brought in
less revenue) become more competitive. Both the team owners and the players saw that doing so was
necessary: more competition meant more rivalries, more exciting games, and more potential revenue
for the league. Unfortunately, as the NHL grew, the revenue gap between small market teams and
large market teams had widened, enabling large market teams to continually attract better players
and thus consistently win more games. However, while both the league and the union agreed that
this situation had to be fixed, they disagreed on how to make this happen.

The league’s proposal had three key components:

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906-038 Negotiating on Thin Ice: The 2004–2005 NHL Lockout (A)

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1. A payroll tax system that would fine teams who exceeded the league’s average payroll. The
collected taxes would then be redistributed to cash-strapped clubs.

2. An unrestricted free-agency system that would limit players’ mobility early in their careers
but enhance it later. This issue, the league hoped, would reduce the bidding-up of players’
salaries, because it would limit the amount of time during their career that players could
accept competing salaries. f

3. A cap (i.e., limit) on rookie (i.e., new player) salaries and on rookie signing bonuses to curb
the amount players initially made. This issue, it was hoped, would not only cut compensation
to rookies, but also provide a drag on their future salaries.

Of the issues presented by the league, the union outright rejected the NHL’s proposed payroll tax.
The union argued that the tax would inhibit owners from paying fair (i.e., “market”) rates, and would
thus artificially deflate salaries. Instead, the union proposed alternative schemes, such as managing
the franchises better and sharing revenues among them, or instituting a gate receipt tax of 5% that
could be levied on the top 16 teams. The NHL rejected all union proposals: none, they argued, would
be as effective as the payroll tax in lessening the revenue gap between small and large market teams.

While the two sides tried to find a way to work through these issues, Bettman embittered the
union by tabling additional demands that scaled back existing player rights, (e.g., eliminating salary
arbitration and per diems, stipulating that players had to pay their own medical insurance, life
insurance and travel expenses for training camp, etc.). All of these, argued Bettman, were necessary
to reduce costs. The union saw it differently. They felt that Bettman was using these issues as threats
to speed up the negotiation.

After four months of negotiation, Bettman agreed to remove the payroll tax from his proposal. In
return, the union agreed to the rookie salary cap, the unrestricted free agency system, and some
modifications to the salary arbitration process. By the time the new CBA was signed, the lockout had
lasted 104 days, from Oct. 1 to Jan. 11, and had thus eliminated nearly half of the scheduled season.

The league believed that the concessions they had extracted would curb escalating salaries and
thereby help small market teams to afford better hockey players and compete more effectively.
According to media sources, there were collective high-fives among NHL management.29 This
interpretation—that team owners had “won” in the 1995 negotiation—would not last long.

1998–1999 Season Renegotiation Request

By the start of the 1998–1999 season, the league was claiming that its last CBA negotiation had
been ineffective in curbing runaway player salaries. Indeed, the opposite seemed to have resulted.
Extending the age of unrestricted free agents limited the number of players in the market at any
time.30 As a result, quality free agents became scarcer and could command top dollars.31 Moreover,
creative contracts (featuring signing and performance bonuses) countered the effects of delayed free
agency and of restrictions on rookie pay.32 For example, on top of a lowered salary base, a rookie
could earn significant bonuses for scoring a certain number of goals or achieving a certain number of
assists. As a result, team owners were able to compensate players lucratively while adhering to
restrictions. Finally, and again to the disappointment of team owners, despite changes in the
arbitration clause, players continued to win most salary arbitrations.33 Looking back, Bill Daly

f Unrestricted free agents can be offered (and can accept) an offer from any team. Under most conditions, new players cannot
accept competing offers for a specified number of years (i.e., they must play for the team that initially hired them).

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