The NBA is investigating whether the Los Angeles Clippers circumvented the salary cap by having Kawhi Leonard sign an endorsement deal with sustainability services company Aspiration, and there are intriguing legal and business considerations.
The controversy surfaced in a report on Wednesday by journalist and podcaster Pable Torre of Pablo Torre Finds Out.
Leonard signed a three-year, $103 million deal with the Clippers as a free agent in 2019. Two years later he exercised an opt-out option and signed a four-year, $176.3 million maximum contract—which could become an important point in the legal analysis—to stay with Los Angeles. That same year the Clippers and Aspiration signed deals that contemplated a $300 million partnership for Aspiration to sponsor the Clippers’ arena and the team’s jersey patch. Ballmer was one of Aspiration’s funders, reportedly investing $50 million.
Through his limited liability company, KL2 Aspire, Leonard agreed to a four-year, $28 million endorsement deal with Aspiration in 2022. Torre reports that Leonard was apparently not obligated to perform actions for payment and that the endorsement deal would end if Leonard was traded.
In a statement, the Clippers refute that they tried to circumvent the cap. The team says they ended their relationship with Aspiration during the 2022-2023 season when Aspiration defaulted on obligations. According to a bankruptcy court filing dated March 31, Aspiration owes the Clippers and KL2 Aspire $30.1 million and $7 million, respectively. The list of creditors also includes the Boston Red Sox, who are listed as being owed $5 million.
Leonard’s situation bears some resemblance to a recent dynamic in college sports, when some so-called “NIL collectives” pay recruits to attend and remain at a college. That type of compensation is not reflective of NIL, which is intended to resemble an endorsement deal. An NIL and endorsement deal captures the use of an athlete’s right of publicity, a legal right that ensures compensation for use of a person’s identifying traits. Some NIL collectives’ payments are instead more akin to pay-for-play, which is prohibited by NCAA rules. The House settlement features a clearinghouse, NIL Go, that reviews NIL deals to ensure they are compliant with pay-for-play rules.
The NBA’s investigation will center on Article XIII of the CBA. This provision prohibits salary-cap circumvention, meaning arrangements by teams to compensate players outside of their employment contracts.
The basic logic of Article XIII is to promote fair play among the 30 teams and prevent teams from cheating. To that end, Article XIII forbids teams from signing side deals with players, such as paying a player to serve as a scout, business partner, endorser or some other position.
The most infamous example of an Article XIII violation is when the Minnesota Timberwolves signed free agent forward Joe Smith to a one-year, $1.8 million deal on Jan. 22, 1999, which was two days after the NBA and NBPA ended their lockout. The contract was surprising since Smith, the No. 1 overall pick in the 1995 NBA Draft, was expected to land a more lucrative deal. The 23-year-old had earned $3.2 million in the previous season when he averaged 15 points and six rebounds a game.
Eyebrows were raised once again a year later when Smith, who averaged 14 points and eight rebounds a game for the Timberwolves, signed a one-year, $2.2 million deal to stay in Minnesota. An NBA investigation discovered that Minnesota, which used the extra cap space to sign other players, had plotted with Smith and his representatives. The team agreed to later sign Smith to a long-term, lucrative deal after they acquired “Larry Bird rights,” which let a team go over the cap to keep a player. NBA commissioner David Stern denounced the scheme as undermining fair play and furnishing the Timberwolves an unfair advantage over other teams. Stern ordered the forfeiture of five first-round picks and a $3.5 million fine.
Leonard’s situation is clearly different in ways that could favor the Clippers. For one, Leonard signed a max contract—unlike with Smith and the Timberwolves, there’s no claim Leonard and the Clippers plotted a scheme where he’d be paid less in the short term in exchange for being paid more later. For another, the Leonard situation involves a separate, non-Clippers company, Aspiration, that would be the wrongful payer; with Smith, the Timberwolves were the payer.
It’s also worth considering how the language of Article 13 applies. Section 1 indicates the NBA can infer a prohibited agreement when two conditions are met: The endorsement compensation exceeds fair market value for services rendered, and the team’s compensation to the player in his NBA contract is “substantially below the fair market value” of the contract.
As to the first condition, if Leonard was paid without an expectation of performing any services, the compensation would have exceeded fair market value; Leonard being paid to do nothing would resemble pay-for-play or a “fake” NIL deal.
But if it turns out Leonard performed services, or offered to perform services, the analysis will shift since he would have fulfilled his contractual obligations. Another factor is whether Aspiration’s financial problems played a role in demanding, or not demanding, Leonard to perform services. If Aspiration was in turmoil, it might not have prioritized the use of celebrity endorsers. Whether the company had other endorsers and used them during this time would be a useful point of analysis.
As to the second condition, Leonard signed a max contract with the Clippers. The contract would not have been “substantially below” fair market value, since it paid him the most he could have earned.
Section 2 of Article 13 is also relevant. It prohibits unauthorized agreements, which includes arrangements between a player and a team or team affiliate in which the player receives compensation. If the Clippers and Aspiration agreed that Aspiration would pay Leonard a side deal to further the Clippers’ employment relationship with Leonard, Section 2 would be a problem for the Clippers. But if the evidence shows Aspiration merely wanted to pay Leonard to get his endorsement, a conspiracy theory involving Ballmer and the Clippers would take a hit.
Ballmer’s relationship with Aspiration is a relevant factor. Ballmer reportedly invested $50 million in the company. It’s unclear, however, whether he was more of a passive investor or played a meaningful role in the company’s operations, or something in between. It’s also unclear how many investors there are in addition to Ballmer and and the amount of their relative contributions.
A team’s sponsors signing endorsement deals with that team’s players is not necessarily problematic. For example, the Red Sox have a longstanding relationship with Sam Adams, a beer company that has partnered with Red Sox third baseman Alex Bregman on the release of Bregman’s Beer. Also, when Michael Jordan owned the Charlotte Hornets, a number of Hornets players, including Kemba Walker and Cody Zeller, had deals with Nike’s Jordan Brand. So long as there is separation between the team and the endorsing company, it’s generally OK.
Another practical consideration is the increasing role of private equity in the NBA and, more generally, pro sports.
The NBA, NHL, MLB and MLS all allow for up to 30% of franchises to be owned by private equity; the NFL permits up to 10%. While each team has a controlling owner, that same team could have many minority owners, some of whom may have investments in companies that could sign endorsement deals with athletes. It’s a complicated fact pattern, and leagues need to be reasonable in policing player endorsement deals that are indirectly, with several degrees of separation, tied to an owner. To that point, players’ associations will remind leagues that their union members have broad rights in signing endorsement deals that can’t be curtailed absent collectively bargained changes.
The NBA’s investigation into Leonard and the Clippers will rely on the league’s extensive expertise in probing controversies. Many of the league’s top officials, including commissioner Adam Silver and executives Rick Buchanan, Dan Rube and Dan Spillane, are seasoned attorneys. They have the power to require Ballmer and Clippers officials to answer questions and share relevant evidence, including emails and texts.
At the same time, the league is a private entity; it lacks subpoena powers and can’t compel testimony or cooperation from persons outside of the league. That is true of Aspiration co-founder Joseph Sandberg, who last month agreed to plead guilty to wire fraud and who federal prosecutors say used his position “to deceive investors and lenders for his own benefit, causing his victims over $248 million in losses.”
Even if Sandberg cooperates and shares relevant information, his admitted misconduct will raise questions about his credibility and whether his cooperation might be intended to portray himself in a more favorable light before a judge sentences him.
Don’t expect the NBA to rush to a conclusion, either. This is a multilayered fact pattern that won’t be an investigatory slam dunk.
