How to read a contract, or, The buyout of Tom Crean

For the past few weeks, I’ve been looking for something to post about, and then I asked myself, What have I been spending way too much time thinking about lately? Basketball, of course, was the obvious answer, and it dawned on me just yesterday: the questions floating out there about Tom Crean’s buyout clause offer me the perfect opportunity to change gears, do something fun, and shake the dust off the old typing fingers.

First, some basics about Tom Crean’s salary. Most of the money he earns falls into one of three categories: base salary, outside income and incentives. Details can be found in his contract, if you care to read it.

His base salary is what he earns to be the head coach at IU, $600,000 per year. Incentives are exactly what you’d expect them to be, extra bonuses for reaching certain academic or competitive milestones.

The fun one is what his contract designates as “outside income.” It’s a bit of a misnomer, since the money is paid to him directly from IU. Essentially, IU retains the rights to engage in all endorsement and marketing deals, keeps the money, and pays Crean from a set schedule. You might think of this money as Crean’s share of the shoe money, at its simplest. His outside income for the year ending June 30, 2015 is $1,880,000.

This income is important because of a change Crean’s agent negotiated when IU extended his contract. Before, Crean’s buyout was the lesser of two numbers: a flat buyout fee of $3 million or the remaining base salary left on his contract.

Now, however, it is the lesser of a flat buyout that follows a declining schedule (currently $12 million) or his remaining outside income (as I type this, a shade over $11 million). So, if IU were to let Crean go today, they’d owe him just over $11 million. Under the old terms, the number would be closer to $4 million.

However, there are two key things to remember about the buyout. First, it is paid over time, monthly through June 2020. Basically, it simply promises that, if Crean is fired without cause, IU will continue to pay him a minimum amount through the end of the contract.

Second, and by far the most important is this: Crean is under a contractual obligation to seek gainful employment in good faith, the earnings of which offset what the university owes him.

There is a long tradition of this kind of expectation in many areas of law, referred to as the expectation of “mitigation of damages.” In torts, for example, if someone causes you injury, you are under an obligation to have the injury treated to prevent it from becoming worse. If you breach a contract for rent, or for the purchase of goods, the landlord or seller is obligated to search in good faith for an alternate tenant or buyer.

If Crean were to simply refuse to look for another job, or if he were to accept a sweetheart deal worth far below his own market value, IU could sue him for breach of contract, and, if they won, he’d lose a fair chunk of his buyout. Much better for Crean, of course, would be to actually find a good-paying job, and let IU off the hook for much of what they owe him.

In other words, in real life, it’s extremely unlikely that IU would ever end up paying Crean anywhere close to $11 million over the next five years, no matter how they part ways.

It’s also worth noting that, should Crean leave on his own accord, he would technically owe IU liquidated damages for breach of contract. Liquidated damages are essentially a predetermined amount of money to cover costs incurred by the university because of Crean’s breach (i.e., searching for a new coach, etc.). If he leaves before July 1 (and if he wants another job next year, he’d probably have to), he’d owe Indiana $8 million. After July 1, it drops to $1 million. Obviously Crean (or whoever hires him) doesn’t want to do this, and if IU is looking for a parting of ways, it’s not in their interest to expect it.

For all of these reasons, and to minimize legal problems in the future, if IU and Crean decide to split, it’s most likely they will come to some kind of exit agreement in which Crean would voluntarily resign, IU would pay him a lump sum payment of, say, a couple million dollars, and both sides would agree the other is free and clear of any further obligations. Crean would get to keep the money and be on his way, and IU would likewise be able to move on.

This isn’t a sports blog, so I’m not making a prediction here, and I certainly don’t want this to be taken as evidence that this type of arrangement is currently in the works. I’m not an insider when it comes to IU athletics. I offer this only as a brief lesson in contracts and good faith mitigation of damages, hopefully one that is more interesting than it otherwise would have been in a different context.