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 3 rd 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