The Opt-Out Clause Is Evolving

Jake Arrieta is now officially a member of the Phillies. For a few weeks, this arrangement was feeling increasingly inevitable, as Scott Boras wasn’t finding longer-term offers, and as the Phillies have had tens of millions of dollars of payroll space. The Phillies are getting closer to relevance, and, among the would-be Arrieta suitors, they have to worry about efficient spending the least. So, here we are, with Arrieta having had his formal press-conference introduction. The Phillies still aren’t anyone’s wild-card favorites, but Arrieta unquestionably makes them stronger. The rotation is now deeper than just Aaron Nola.

The player in question is interesting enough on his own. Entire books could be written about Arrieta’s career, and he still has another few chapters to go. Arrieta has experienced dizzying highs and unthinkable lows, which makes him out to be something inspiring. But let me warn you right now, this is not a post about Arrieta’s professional achievements. It’s not a post about whether I think Arrieta is going to age gracefully. This is a post about the contract. The inanimate paper contract. Specifically, this is a post about a clause in the contract. You should leave now if you don’t care about this. But with the Jake Arrieta deal, the Phillies and Scott Boras have agreed to something new.

As it’s been reported, Arrieta signed with the Phillies for three years and $75 million. This is the breakdown:

  • 2018: $30 million
  • 2019: $25 million
  • 2020: $20 million

Pretty straightforward. The contract is front-loaded. Additionally, Arrieta can opt out after the 2019 season, if he wants. That would mean he effectively signed with the Phillies for two years and $55 million. All of that looks fairly normal, in this day and age. What’s particularly interesting is the new twist. While Arrieta has an opt-out clause, the Phillies can also void that opt-out clause. And it’s voiding through a contract extension, that would pay Arrieta $20 million in both 2021 and 2022. Those salaries could go up to $25 million each, if Arrieta makes enough starts over the next two years. And those salaries could go up to $30 million each, if Arrieta finishes high enough in the Cy Young voting. This is a structure we haven’t seen before.

Arrieta signed for three years and $75 million. This might end up being two years and $55 million. Or it might end up being five years and $115 million, or $125 million, or $135 million. There are a lot of ways for this contract to go. And what the Phillies have basically done is give themselves some extra protection.

Consider the example of a more familiar contract. The Red Sox gave J.D. Martinez an opt-out. The Red Sox actually gave J.D. Martinez more than one opt-out, but, anyway. The opt-out, on its own, works well for the player, and it works against the team. Opt-out clauses in general are a way for teams to give more value to players without those values coming in the form of salary. They can be important for teams worried about approaching the competitive-balance-tax threshold. For Martinez, if he’s bad, he gets his guaranteed money. But if he’s very good, he can choose to re-enter the free-agent market. In theory, Martinez would only opt out if he stood to earn more money from a new deal. This is why such clauses are player-friendly. If Martinez were in position to opt out, the Red Sox would like to still have him. The team loses out on good seasons, putting a cap on a contract’s upside.

Now look at what the Phillies have done. I believe this to be the first opt-out-clause offset. Forget about the first two years. Those two years are set in stone. Headed into 2020, Arrieta could opt out of one year and $20 million. But the Phillies could also effectively choose to extend him, for three years and $60 – 80 million. If Arrieta is just pretty good, I imagine he’d opt out, and that would be that. But now imagine that Arrieta is very good. He rediscovers his control and his cutter-slider hybrid plays up again. It might not be the most likely outcome, but if Arrieta gets back to pitching like an ace, then the Phillies don’t have to lose him. Just as the value to Arrieta is the possibility to opt out if he thinks he can get more than $20 million, the value to the Phillies is the possibility to keep Arrieta if they think he’ll be worth more than $60 – 80 million. The Phillies end up with some protection, because they could extend Arrieta for less than they figure he’d get on the market.

This feels like a natural evolution of the opt-out clause. Opt-out clauses aren’t as complicated as they seem; they’re more or less just multi-year player options. They’ve started to show up increasingly often. At first, contracts included one opt-out clause. Then we saw contracts with multiple opt-out clauses, like Martinez’s, or Jason Heyward’s. Now we have our first opt-out offset. And, when I asked around, I got the impression we’ll see more of this. More teams are going to talk about voiding opt-outs with contract extensions. Teams might think about including club options, following player opt-outs. A standard opt-out clause has a value to the player, which some people estimate to be around $20 million or so. Teams are going to look to drive that value down, by asking for their own protective clauses. There’s nothing nefarious here — all contracts are negotiated, and agreed upon. This is just something to get used to. If a regular opt-out tripped you up before, things are only going to get more complex. I can’t even imagine how they’re going to structure Bryce Harper’s free-agent deal next winter. That’s going to necessitate untold levels of creativity.

To bring this back to Arrieta, he’s a 32-year-old former ace with a number of downward-pointing arrows. By far the most probable outcome of all of this is that Arrieta simply spends three years with the Phillies, earning the $75 million. If he were to opt out, he’d be doing so headed into his age-34 season. How many 34-year-old starters are going to find $20 million on the market? Arrieta probably won’t opt out, which would render the clauses irrelevant. Sometimes complicated contracts work out simply.

But, you never know. The ball still dances out of Arrieta’s right hand. He just hasn’t been controlling it quite so well. Arrieta might find his location again. He might get Cy Young support again. It’s not too terribly probable, but if Arrieta were to experience a career resurgence, then the Phillies have negotiated built-in protection. Instead of just allowing Arrieta to walk early, the Phillies have given themselves the chance to hang on to Arrieta for even longer, at what would presumably be a below-market rate. This is a new twist in the opt-out world, and it’s not going to go away, as agents ask for more opt-out clauses in the first place. Teams are going to ask for their own clauses in return, to protect themselves in case players are extremely good, or extremely bad. It’s the way this was bound to go. It was never going to be regular opt-outs forever. And so it’s going to be on the agents to make sure that, in any given deal, they’re not conceding so much that the player opt-out loses almost all of its value. Used right, an opt-out clause can be a powerful tool. We’ve just now seen our first industry response.

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Jeff made Lookout Landing a thing, but he does not still write there about the Mariners. He does write here, sometimes about the Mariners, but usually not.

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ballskwok
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ballskwok

So it’s unclear to me, and maybe nobody knows, but does Arrieta have to opt out first for the Phillies to be able to pick up the extension, or can the Phillies decide on their own to void the opt out by extending him before he has a chance to opt out?

The way Jay Jaffe’s article read yesterday, it looked like Arrieta decides first, and then the Phillies get to decide if they want to let him hit the market or pick up the extension.