An Offer Sheet for the NHL

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On Friday July
6th, Edmonton Oilers General Manager Kevin Lowe tendered a 7-year,
$50 million contract offer to Thomas Vanek of the Buffalo Sabres,
a type of contract known to those in hockey as an “RFA Offer Sheet.”
To fully explain the ramifications of this to those ignorant of
the NHL’s business methods is something I will undertake in a moment,
but for now, understand that if Thomas Vanek were to play in the
NHL next fall, he was the property of the Buffalo Sabres for as
long as they held his rights.

As of Friday
morning Thomas Vanek was not under contract to play for Buffalo
and, if he so chose, could go play in any other league that did
not have an agreement with the NHL which would inhibit his doing
so, the Russian Super League for example. But, as per the rules
of the current Collective Bargaining Agreement (CBA) between the
NHL and the NHL Players Association, if he chose to remain in the
NHL then the Buffalo Sabres would have leverage over the 29 other
teams in the league.

His status
on Friday was that of a Group II Restricted Free Agent without Arbitration
Rights. And, before I go any further, I believe it’s necessary to
explain how he got to this point, which will illuminate some of
the rules which bear on this moment in NHL history.

Thomas Vanek
was drafted 5th overall by the Sabres in the 2003 NHL Entry Draft.
That act by the Sabres meant that they had the exclusive negotiating
rights to him for two years. If the two parties could not reach
an agreement then Mr. Vanek would re-enter the draft in 2005 for
any other team to choose him. If he was not drafted then, he would
be completely unfettered in which team he could play for.

The Sabres
and Vanek did, indeed, agree on a 3-year contract in 2004. After
spending another year at the University of Minnesota where he’d
scored the NCAA Championship clinching goal 2 months before being
drafted by the Sabres at the HSBC Arena in Buffalo, Vanek spent
the next year with the Rochester Americans of the AHL, tearing that
league up. The past two seasons he’s been a member of the Buffalo
Sabres, scoring 68 goals in the process and becoming one of the
premier offensive forces in the NHL, seemingly fulfilling the promise
he showed in junior hockey. In this observer’s opinion he’s an improved
version of Jaromir Jagr playing on the left wing at 6’2,” 222 lbs.

contracts, like the one Vanek just completed, have a maximum length
of 3 years under both the previous and current CBA. During that
contract Vanek made $942,000 while playing for Buffalo, and a whole
lot less for the year he spent in Rochester.

So, here he
is, playing on one of the best teams in the NHL, leading them in
goal-scoring (43) while playing significantly fewer minutes per
game than any other player so prolific (just under 17 minutes/game),
selected to the 2nd team All-Star unit by the hockey intelligencia,
and, heading into the Free Agent signing period, which opened on
July 1st at noon, one of the most coveted players on the market,
along with a couple of his teammates (Chris Drury and Daniel Briere,
both of whom signed with different teams).

But, if the
Sabres had his rights, then how was he available for Lowe to sign
him to a contract?

After a player
fulfills his entry-level contract he is then in the category Vanek
was, Group II RFA w/o arbitration rights, and as such could be tendered
an offer from any team in the league which the Sabres would have
the right to match, thereby signing him to that contract and retaining
the player. If they declined to match the offer they would be awarded
compensatory draft picks from the Oilers based on the value of the
contract signed, in this case 4 first-round picks.

That is exactly
what transpired Friday morning. The Oilers entered into an agreement
with Vanek to a 7-year, $50 million contract and the Sabres decided
to match the offer and forego the draft pick compensation. Considering
the quality of the Oilers situation right now, they would have been
fairly high picks for at least the next two years (and supposedly
deep, talent-rich drafts they are).

Alright, now
that you have the background and understand the situation, now let’s
look at what is wrong with that arrangement. There’s so much…
where to begin?

First, let
me state, that as an Austrian and free marketeer all of this seems
terribly complicated. But, given that the internal economics of
a sports league create capital allocation problems that fall under
the purview of games theory and the NHL exists in the imperfect
legislative landscape that is the United States and Canada at both
the national and local levels, it is understandable that some framework
to normalize capital amongst the 30 franchises is needed to maximize
the NHL seemingly at the expense of some of its members. Given that
the revenues of the league are growing at an astonishing rate even
without a television contract in the US that generates any, I’d
say some of what has been implemented is working.

As well, the
problems in this CBA relative to that described above should be
the subject of a completely different article or series thereof.
For this one, I simply want to point out how to fix Restricted Free
Agency and make it more free-market in its approach.

For all of
the complications and variables that are bearing on the situation
that played itself out last week, the fix, in my mind, is a very
simple one.

Given that
the NHL has a varied geographic and economic background it makes
sense that one of the ways in which teams of more limited resources
(and, more importantly resource potential) can remain competitive
is to retain the rights to the players they draft and develop for
far longer than they could afford to pay them in an freer marketplace,
thereby granting themselves a huge discount for their younger players
and, in their minds, maximizing their return on investment. This
is the thinking that went into the whole RFA process.

It is safe
to say, though, that market forces have been systematically breaking
that system down in all sports over the past 40 years, and hockey,
in particular, over the past 15 or so. Even this latest CBA, which
was widely perceived as a home run for management insofar as they
got most of their demands for ‘cost certainty,’ there were serious
concessions to the NHLPA in terms of the length and strength of
Restricted Free Agency.

One of them
was the lowering of the compensation packages to be paid in the
event of signing
away a player via the Group II Offer Sheet provision
. Contracts
up to $2.3 million dollars in value would yield only a 2nd round
pick in compensation. Whereas for top-end players the cost dropped
from five first-round picks to four. Couple this with a salary cap
the system could turn predatory very quickly. Believe me, I’ve envisioned
many a doomsday scenario concerning the Sabres collection of young
and relatively inexpensive talent…. not a $50 million one, mind
you, but others most especially.

The problem
though, is that the team having their player signed away is in no
position to have a say in the compensation received, and this is
where the market imbalance created by Restricted Free Agency perpetuates
itself. The NHL and the NHLPA, two organizations with much different
agendas than the parties involved in the transaction, have set the
terms of the transaction to the point of assigning an arbitrary
value to the worth of a player and the contract he is supposedly

But, as we
all know, there is absolutely no way to predict what anyone will
value these things at the moment a transaction is possible. Moreover,
it follows that an offer sheet will only be made when a player is
worth far more than the compensation stipulated in the CBA to the
team making the offer. That team will use that arbitrage as leverage
to take a player from one team after the other team has spent the
resources and time to develop that player into the one he is when
the contract is offered.

the team whose player is being signed away has to accept either
the contract offer made by another team or a set of future assets
of unknown quality, forsaking any immediate goals. No option exists
to trade present assets for present assets.

This is the
fulcrum of the problem and the solution, as always, lies in creating
opportunity for both sides to have their specific needs met in the
most voluntary manner possible. Therefore, a more effective solution
to this situation is for the following process to be implemented:

  1. Team A enters
    into an agreement with Player from Team B for his employment.
  2. Teams A
    and B then enter into negotiations for a potential compensation
    package for the player in question, if they agree then Team B
    decides to either accept or match the contract offer. This period
    lasts 7 days, which is the current length of time a team has to
    decide to match or take compensation.
  3. At the end
    of 7 days, if no agreement is reached the NHL appoints an arbitrator
    to use the two packages on the table to craft a compromise which
    Team B can then either accept or match the initial contract offer.

the Group II system should be changed to be a system where the team
which holds the player’s rights can be forced to assess the real
worth of the player in the marketplace while at the same time preserving
the capital expended by them to develop that player. As well, it
should help the capital stock of the NHL find the teams where it
is most needed. In the case of Thomas Vanek, a model small-market
franchise who realizes they have to be exceptionally prudent with
their home-grown talent to even survive in the league, no less thrive
like they have in recent years, spent the time and resources helping
mould him into an elite player was preyed upon by an incompetent
smaller-market franchise, the Edmonton Oilers, who don’t value their
draft picks because they can never seem to pick or develop them
into great players.

And, given
that the NHL is not a free market, it’s imperative that they must.
The NHL is a corporation with 30 divisions who are not only dependent
upon one another for revenue (with no opposition, there are no games
to be played) but compete internally amongst themselves in a nigh-perpetual
manner. For the NHL to be successful and expand its reach into new
markets all of the markets they have must remain competitive in
the long run. A team that is competent at drafting and developing
talent may not be any good at assessing its value, which might be
an adequate description of the Buffalo Sabres.

So, while Restricted
Free Agency may be a bad mechanism to reward teams for their capital
investment, the Group II Offer Sheet system only compounds the problem
by not letting the teams reap the full reward of their investment.
And, while the proposed change to the system is not perfect, by
any stretch, it is superior to the one currently in place, especially
within the context of the salary cap and the rest of the current

And, if this
system was in place, Kevin Lowe’s offer sheet might not have been
quite so outlandish, feeling the need to make it so big that Regier
would not match it, along with the compensation staying the same.
Conversely, Darcy Regier and the Sabres might have taken more than
20 seconds to decide to match the contract offer, if only out of
principle and the desire to stand by the other players he has under
contract. As well, he might not have been so angry at Lowe for not
doing what Lowe should have been doing well before that he reached
the crisis moment of offering Vanek that contract, namely being
a GM actually making good decisions to improve his hockey club.
Frankly, this might have been the best decision he’s made since
the Oilers lost to Carolina in Game 7 of the 2006 Cup Finals and
he allowed Chris Pronger to renege on the contract he signed the
previous summer. Vanek is 5 times the player than that which exists
currently on the Oilers.

The RFA system
has now essentially, for top-end talent of which there is precious
little, made them Unrestricted Free Agents at the end of their entry
level contract, as early as 21 and as late as 23 years of age. The
Pittsburgh Penguins are learning that with 20-year-old Sidney Crosby,
who is already the best player in the league and a “generational”
talent, and have already locked him up for the next 5 years at an
average salary of just under $9 million per year. If they hadn't
done that, ask anyone in hockey, and there isn’t one of us who wouldn’t
gladly trade 4 first-rounders for him. Because, on average, it takes
about 300 first-round picks to uncover one Sidney Crosby.


11, 2007

Luongo [send him email]
is a professional chemist, amateur economist and obstreperous Southerner-in-Training.
In addition to publishing his personal blog, he currently contributes
to AOL’s NHL Fan
as well as covers the Buffalo Sabres at Sabre

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