Exploring Possible Alternatives to Player Opt Out Clauses

Player opt-out clauses – which grant a player the ability to unilaterally void a contract at a set date – are becoming more en vogue in Major League Baseball.  Zach Grenkie exercised his right to opt-out of his deal with the Los Angeles Dodgers this offseason and cashed in with the Arizona Diamondbacks.  David Price, Jason Heyward and Scott Kazmir each signed contracts with similar out clauses this offseason.

Dan Duquette is on record stating that contract clauses allowing a player to unilaterally opt out of their contract will likely not work for the Orioles.

Dan Duquette is on record stating that contract clauses allowing a player to unilaterally opt out of their contract will likely not work for the Orioles.

The benefit to the player is rather obvious.  If at the opt-out date the player believes he can earn more in future years by once again becoming a free agent, he can elect free agency.  If the player wishes to leave his current team for any other reason, he can.  A guaranteed contract with a player opt-out clause provides the player who signs such a contract with both downside protection (the guarantee) and upside potential (the opt-out).

For the organization, the downside remains the same.  If a player signs a 6 year deal for $100 million total and suffers a career altering injury in the first year of the contract, the team will almost certainly be on the hook for the entire length of the contract whether an opt-out is included or not.  However, the upside part of the equation does change for the team.  If a player signed to a long-term deal surpasses expectations to the point where his value exceeds the term of his contract, under a non-opt out deal the team benefits.  Under an opt-out agreement, the player will merely opt-out of the deal, robbing the team of any potential long-term upside.  Under this scenario, the best a team can hope is to get good seasons out of the player before he opts out.

For that reason, Dan Duquette has made it known that the Orioles are philosophically opposed to opt-out clauses.  The contracts essentially give all the power to the player while robbing the team of potential long-term benefits.

The counter argument to the concerns raised by Duquette and the Orioles is the notion that in most situations, a player exercising an opt-out will be doing the team a favor.  With most long-term deals, teams are paying roughly fair market value for the first several years and knowingly overpaying for the player’s declining years simply because that is the cost of getting a deal done.  Therefore, if a player opts-out before those declining seasons, the team might come out ahead.  That might be true, but that still requires a team to assume all of the risk while hoping that one specific scenario plays out: the player performs during the pre-opt-out period, takes the opt-out, and declines significantly in the following years (or is at least adequately replaced). 

In other words, with an opt-out a player is going to get his money one way or the other unless he errs in exercising his out clause. The team might get what they want, they might end up somewhere in the middle, or they might get burned.  Perhaps most importantly, the player can dictate how things play out after the contract is signed while the team is reduced to a bystander, hoping and wishing that the player’s performance benefits – or at least does not hurt – the team.  The benefits of the contracts heavily lean in the favor of the player and pointing out that these clauses could benefit the team if specific things were to occur does not change that fact.

There is some concern that if the Orioles are not flexible in their approach and that if opt-out clauses become the norm, the organization will be left behind and unable to sign any quality free agents.  I think it might be too early to worry about that worst case scenario.

The more immediate question for me is whether the Orioles can do anything – perhaps as early as this offseason – to sign a player wishing to receive some or all of the additional benefits provided by an opt-out without actually including an opt out clause?

That remains to be seen but there might be options to consider.  One in particular feels like a strong alternative to an opt-out clause that the Orioles could at least present to certain free agents who would ideally prefer a way to remove themselves from a contract.

We will use Justin Upton as the example.  Let’s imagine the very imaginable scenario that Upton is unable to secure the sort of long-term deal he is seeking this offseason.  Maybe he is unable to secure an adequate long-term offer with an opt out either or maybe he does but would still be more interested in signing with the Orioles if all other terms are roughly equal.   Next year’s free agent market is weak and Upton might want the option to jump back in next year. 

We will assume that the Orioles do not bend from their opt out stance but offer a contract that allows Upton opportunities to re-enter the free agent market if he chooses in future years while also providing a certain amount of downside protection to the team that would not be available under a contract with an opt-out clause.  That contract structure – which would allow for a total value of 7 years/$140m – could potentially look something like this:

2016 – 1 year/$18 million guaranteed

Player Option Years

2017 - $20m
2018 - $20m

Mutual Option Years

2019 - $21m
2020 - $21m

Vesting options (both years vest if 2020 mutual option is exercised)

2021 - $20m
2022 - $20m

There are a lot of elements at play here.

First, the player essentially receives four opportunities to exit (opt-out of) the contract: before the 2017, 2018, 2019, and 2020 seasons.  If Upton is concerned that sometime in the near future he will be worth more than he would earn under this agreement, this structure allows him to get out on four different occasions and test the free agency market.  In addition, once Upton and the team agree on the 2020 contract then Upton is guaranteed the final two years.  His downside is that if he does not perform for whatever reason(s), he is would only earn $60m over three years before looking for a new contract at age 31.  The upside is he exits the contract before years 2 through 5 to seek a larger guaranteed contract or he performs well enough to earn $140m over seven years.

If Upton received a similar deal with a straight opt-out included after 2018, he might be more inclined to take that deal since the downside would be 7 years/$140m as opposed to 3 years/$60m.  He might not, however, if he would prefer to have the ability to exit the contract after the first year.  In most cases, I would say that the player would choose an opt-out over this structure if everything else was equal but there are certainly reasons – such as the ability to opt out earlier – that might entice a player to agree to this structure.

From the team standpoint, what the player potentially loses the team gains.  The Orioles would go from a worst case scenario of paying a useless player $140m over seven seasons to paying a possibly useless player $60m over three seasons.  The downside risk is lessened for the team, which is essentially the Orioles issue with the opt-out clauses.

The mutual options in the middle years create a situation where both parties have to agree to continue the relationship.  The mutual options create an equitable situation for both parties with neither party holding more leverage than the other.  The reasoning behind the guaranteed final two years if the 5th year mutual option is agreed upon is to recognize that an aging – and potentially declining – player will at some point want guaranteed money instead of constantly going year to year.  It does not seem reasonable to expect a player to go year-by-year for more than a couple of seasons.

It is certainly possible that the mutual options in the middle years could be replaced by team options (or one player option and one team option).  That would be preferable for the Orioles but less preferable for a player seeking the ability to control is own future while limiting his downside.   The mutual options were used as somewhat of a compromise to give the team a tad more leverage over an opt-out while still allowing the player to get out of the contract if he chooses.

That is just one example.  As is the case with all contracts, whether this structure would work is dependent on the situation.

Ultimately however, I believe that this example demonstrates that even if the Orioles take a hardline stance against opt-out clauses they can still potentially compete in a free agent environment where such clauses exist.  They will need to get creative in structuring contracts while also correctly identifying the players who are best suited for these uniquely structured deals.  It does seem possible it can be done.  Of course, if opt-outs become so commonplace as to be rendered standard practice, than that could force the organization’s hand.  As long as that is not the case, however, there exists opportunities for the Orioles (or any team) to creatively sign certain players seeking some additional leverage without the team assuming the entire risk.