A team with a player in his "arbitration years" has essentially three options. First, it can go through the arbitration process (using what is known as "Final Offer Arbitration"). Second, it can reach a contract to avoid arbitration, whether it is a long term deal or merely a one-year deal that splits the difference between the amount the player seeks and the team has offered. Finally, the team can non-tender the player, which is shorthand for saying that the team declines to offer the player a contract at all, making him a free agent.
Beyond The Boxscore
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