Introduction to Antitrust and Sports

Key Questions in Sports Antitrust

• Is the sports league a single entity, or are league rules considered an agreement among the member clubs?• Are restraints of trade in the labor market subject to the Sherman

Act? If so, what is the effect of unionization?• What is the actual effect of agreements in the marketplace?• Effect of price (salaries, rights sales, consumer prices)• Effect on quality• Effect on overall fan appeal

• What is the legal standard to evaluate antitrust challenges? How do courts balance harms and benefits?

STRUCTURE OF A LEAGUE• Comparative study reveals different type of league

structures• North American closed commercial leagues• Spanish/Latin American member club leagues• Vertical separation: NASCAR

SINGLE ENTITY DEFENSE

• Not relevant to §2 claims• League as “single entity” arises elsewhere:• labor: bargaining on league-wide basis• bankruptcy: league liability for club debts• corporate: fiduciary duty re league policies

• Precludes §1 challenge to sports league• Two §1 Concerns re Sports• Club agreement eliminates competition between the clubs that would

otherwise benefit consumers• League decisions distorted because leagues controlled by clubs

Intro Problem: Cricket Agreement

• Eight investors create a cricket league where each will operate a club in the U.S.; they agree to severely limit competition for player services, but are concerned about whether they will face antitrust liability?• Is this rule [544a] "one adopted more for the protection of individual

lg members from competition than to help the league?“• What result if Warren Buffett owned the league?

Self-interest v League-as-a-Whole: a role-playing exercise

• Assuming a club-run league, as CEO what kinds of restrictions on players would you recommend that the league adopt?• If you were to be the owner of a NY franchise (largest, huge and

diverse base of cricket fans from many countries), what rules would you prefer?• If you were to be the owner of a Chicago franchise (large market, but

almost exclusively Indian and Pakistani cricket fans)?• If you were to be the owner of the franchise in the smallest of the 8

markets?

AMERICAN NEEDLE• Captain Renault antitrust• Two decisions challenged• NFL rule that clubs must assign exclusive rights to TM/logos

to NFLP• NFLP decision to assign these rights only to Reebok

2/ Needle

• Basic principles• [573]: “eschew formalistic distinctions” for “consideration of how the parties ...

actually operate”• Sealy [573a]: where corporation controlled by rivals, pierce veil and §1 applies• Copperweld [547]: distinguishes between “a single aggressive entrepreneur” and

“independent centers of decisionmaking” • [574a]: central evil of §1 is the “elimination of competition that would otherwise

exist”

• Conclusion: challenged exclusive licensing of trademarks is subject to section 1• “each team’s decision reflects not only an interest in NFLP’s profits but also an

interest in the team’s individual profits”

/3 Needle• Do you agree with Judge Williams in

Raiders dissent [562] and Judge Easterbrook in Bulls [564-5] that "NBA Basketball" is one product from a single source, like McDonalds or GM?• Judge Cudahy in Bulls says focus is on

whether league structure leads to inefficient management decisions; Agree that the club-run structure represents the “most efficient manner of reaching day-to-day decisions” for the league?

MLB Advanced Media

• Initial grant of IP rights is clearly an agreement after American Needle• MLBAM, LLC is not run by all 30 MLB owners; rather, each owner is a

shareholder and Board of Directors are some owners and some MLB executives• If this initial grant is lawful, then no serious risk of distortion, because

MLBAM likely to be found to be a single entity

Organizing the US Cricket League

• From a legal perspective, would league controlled by the owners of the 8 teams be a single entity?• How could the league be structured so that it would be recognized as

a single entity?• Is the agreement among the club owners on how to initially structure

the league itself an agreement subject to challenge? Could someone sue MLB demanding that it restructure itself?

Application of Section 1 to Sports League Agreements: NCAA v. Board of Regents

1> Sherman Act only bars unreasonable restraints of trade

2> use Rule of Reason because this "involves an industry in which horizontal restraints on competition are essential if the product is to be available at all"

3> KEY R/R EXPOSITION: “Price is higher and output lower than they would otherwise be, and both are unresponsive to consumer preference.”

4> THUS: "these hallmarks of anticompetitive behavior place upon petitioner a heavy burden of establishing an affirmative defense which competitively justifies this apparent deviation from the operations of a free market"

The Rule of Reason

• Plaintiff establishes an actual anticompetitive effect• Direct evidence = point #3 above re prices and output• Indirect evidence = defendants have market power in a properly defined “relevant

market”• What other products can consumers find that are “reasonable substitutes” for the products in the

purported market? (Here, court finds college football is the relevant market)

• Defendant establishes legitimate justifications• Cost-saving or other efficiencies in joint action rather than individual freedom to compete• Strengthen ability to compete against rivals• Protecting products that cannot survive free competition is NOT legitimate• Maintaining competitive balance

• Plaintiff can rebut by showing that challenge rule is not “reasonably necessary” or “appropriately tailored“ to achieving legitimate purposes

Antitrust in Action

• 1981: NCAA contracts allowed 2 networks 14 games each per season, w/ TBS having cable rights to ~11 games• max 5 games/ wk• after decision, number of games tripled, fees p/game were quartered,

while attendance rose marginally• NCAA observed [fn68] that smaller programs actually would be better

off with ability to televise own games; why did NCAA members adopt a rule that may have adversely affected many member schools?

Applying Rule of Reason to Cricket Agreement

• Is there a likely anticompetitive effect on salaries or the allocation of players among teams?• Are there reasons to treat this agreement differently than an MLB agreement

re baseball players?

• Are there any legitimate pro-competitive justifications for the agreement?• Are there some clear less restrictive alternatives that the owners could

agree upon that would achieve their legitimate purposes?

American Needle in Perspective

• Recall concerns in Flood and as noted in 1958 House debate• Judiciary Committee bill would have exempted rules “reasonably necessary” for

competitive balance, exclusive territories, public confidence in integrity of game, and regulation of broadcast rights

• House-passed bill would have exempted any league rule that “related to” drafts, reserve clauses, exclusive territories, and integrity

• Conclusion that NFL is a single entity would effectively have established House-passed bill; application of rule of reason effectively establishes Judiciary Committee’s version• Key is 3rd prong of rule of reason: should sports leagues be required to

demonstrate in court, subject to treble damage liability, that their rules are not overly restrictive