Nothing | Course Paper

9-906-038

REV: MARCH 04, 2006

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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.

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.

DEEPAK MALHOTRA

MALY HOUT

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

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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

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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)

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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

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

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