Sports Business Cases Challenge League Power

Monday, August 2, 2010 - 00:00

Editor: Can you briefly describe your backgrounds for our readers?

Nager: I chair Jones Day's Issues and Appeals Practice. I've argued 13 cases in the United States Supreme Court, including the recent American Needle case and the earlier Dagher joint venture case. Although employment law is my substantive specialty, I've argued cases in many subject areas, including antitrust, intellectual property, and products liability.

Sims: I am Jones Day's senior antitrust lawyer. I've represented clients such as Apple, Chevron, Dell, General Motors, Procter & Gamble, Sirius-XM, Comcast, Hertz and CBS in a full range of antitrust issues. I believe I'm the only antitrust lawyer ever recognized (twice, in 2001 and 2009) as a "Dealmaker of the Year" by The American Lawyer , and earlier this year National Law Journal named me one of "The Decade's Most Influential Lawyers."

Editor: Glen, aside from your litigation work on sports disputes, could you tell us about your personal role in the world of golf?

Nager: I am presently Vice President of the United States Golf Association and a member of its 15-member Executive Committee. I am presently Chair of the Rules of Golf Committee, Chair of the Compensation Committee, Chair of the Men's State Team Championship, and a member of the Championship Committee, Future Sites Committee, Strategic Planning Committee, Commercial Committee, and Finance Committee. I am also a member of the Joint Rules of Golf Committee between the USGA and the R&A of Scotland. From 2006-2008, I was General Counsel of the USGA.

Editor: Can you give us an overview of Jones Day's involvement in sports representations and, in particular, your recent win versus the NFL before the U.S. Supreme Court?

Nager: Jones Day has been at the forefront of recent disputes involving the power of sports leagues to engage in mandatory collective economic activity to the exclusion of competition by others in the area of sports merchandising, licensing, marketing, broadcasting, and internet streaming. Jones Day represented American Needle in its Supreme Court litigation with the National Football League. Jones Day represented the New York Rangers in their litigation with the National Hockey League.

In American Needle , the Court held in May that agreements of the NFL's teams are subject to scrutiny under the antitrust laws. American Needle challenged an agreement among NFL teams to grant Reebok an exclusive license to produce and sell team-logoed headwear. The Seventh Circuit had affirmed summary judgment for the NFL on the ground that the NFL and its teams are a so-called single entity whose internal agreements are immune from scrutiny under Section 1 of the Sherman Antitrust Act. In a unanimous opinion, the Supreme Court reversed, holding that Section 1 scrutiny necessarily applies to agreements among entities that have separate economic interests and that are independent actors capable of making independent decisions. Applying this test to the NFL teams, the Court held that the NFL teams are separate and independent businesses that are not entitled to be treated as a "single entity"; accordingly, the teams' agreements (and those of the teams' instrumentality, NFL Properties, Inc.) must be scrutinized under the rule of reason.

Editor: How did Jones Day become involved in these matters?

Nager: The New York Rangers sought out Jones Day to handle its litigation with the National Hockey League because of Jones Day's reputation and resources in antitrust and litigation. Joe Sims and Meir Feder were part of the original Rangers team. I became involved when it looked like there might be an expedited appeal to the Second Circuit of a preliminary injunction issue. American Needle sought out Jones Day to handle its Supreme Court litigation with the National Football League because of Jones Day's experience in the Rangers case and because of Jones Day's Supreme Court practice. American Needle was particularly interested in the fact that the same team had handled another recent Supreme Court case involving antitrust scrutiny of joint ventures - a case called Texaco v. Dagher , where we were able to obtain a unanimous decision reversing the Ninth Circuit on behalf of Chevron (which had acquired the Texaco assets involved). The Dagher case involved some of the same issues of the application of antitrust law to joint ventures that were the focus of American Needle ; in fact, the NFL's counsel heavily relied on Dagher to support their arguments. Since I had argued and won Dagher in the Supreme Court, we felt pretty strongly that the NFL's attempted use of Dagher to advance its arguments was misplaced and were grateful to get the opportunity to make that argument in American Needle .

Editor: Joe, can you tell us more about the antitrust status of sports leagues?

Sims: Professional sports leagues are interesting entities. In some ways, they are traditional joint ventures - independent entities that join together to produce a product that none can fully produce individually. The antitrust status of such joint ventures is reasonably clear: to the extent the venture increases rather than reduces competition, it is permissible, but any joint activity that reduces existing or potential competition must be justified as reasonably necessary to the venture itself. Professional sports leagues began as reasonably simple ventures, where the member teams agreed on playing rules and schedules, but left everything else to the individual member teams. Over the decades, there has been a steady increase in the collective activity of the leagues, and a corresponding elimination of the independent competitive activity of the individual teams.

For example, for many years the individual teams did all their own marketing and promotion - advertising, merchandise, and even broadcasting arrangements. Over time, the teams began to attempt to handle various aspects of this as a group. The early efforts to do so drew significant antitrust opposition; indeed, eventually Congress passed legislation exempting professional sports leagues from antitrust attack for collectively negotiating national television broadcasting agreements (an action that the Department of Justice had challenged as a violation of the Sherman Act). While that legislation was in fact very narrow, it seemed to encourage the teams to aggregate more and more collective activity in the leagues, and so over time the leagues became the vehicle for the teams to do many things jointly that had historically been done independently, from selling hats to (most recently) Internet activities. A parallel development that further empowered the league was the unionization of players and the resulting collective bargaining agreements between the teams (acting together as the league) and the players' unions in the various professional sports.

Of course, the antitrust laws did not go away, and over the years there were periodic attacks on various aspects of the collective activity of the teams acting through the league. Eventually, the lawyers for the leagues came to advance the notion that much of the collective activity of the teams through the league was exempt from antitrust attack because of the so-called single entity doctrine - the notion that to have a violation of Section 1 of the Sherman Act (the part that deals with collective action), there must be at least two participants, and that the league joint ventures were so integrated that they should be considered in toto, as just one entity, and thus subject only to Section 2 of the Sherman Act (the part that deals with monopoly). If this argument had been successful, antitrust challenges to team collective activity would have become much more difficult, since the legal standards for showing a violation of Section 2 (monopolization) are much tougher than those involving Section 1 (conspiracy and agreements in restraint of trade).

These single entity arguments came to be part of the standard defense strategy of professional sports leagues to almost every antitrust challenge. The NHL, for example, tried to make this argument in the Rangers litigation, but was unsuccessful. In fact, this argument had been uniformly unsuccessful until American Needle , when both the district court and the Seventh Circuit inexplicably accepted the argument as a complete defense to American Needle's antitrust challenge. We say inexplicably because, as the unanimous Supreme Court opinion shows, it is hard to understand how a joint venture like a sports league, made up of multiple independent entities (the teams) with widely varying interests and capacities, could plausibly be seen as an entity made up of venturers that had fully uniform interests. Nevertheless, the Seventh Circuit accepted the NFL's argument, American Needle sought certiorari from the Supreme Court, and that is when Jones Day joined the American Needle team.

Editor: What are the pressing issues professional sports franchises and suppliers have with regards to their interactions with leagues?

Nager: Sports leagues are artificial entities made up of individual teams that choose to join together to create what is in effect an annual tournament. They do this because they believe that there will be more interest, and thus more potential revenue, from a tournament competition than there would be from individual contests between teams. Of course, that was the beginning of professional sports in this country - individual teams barnstorming around the country playing games against each other or against local teams. Some professional sports teams still follow this model: the Harlem Globetrotters are perhaps the most well-known of the barnstorming teams. But over time, most teams concluded that banding together, creating a league with standardized rules and a tournament schedule that produced an annual champion, would maximize fan interest and revenues. Given the success of professional sports around the world, it is hard to argue with this logic. So a joint venture of individual teams that establishes a schedule, standardizes rules and (today in the U.S. at least) collectively bargains with players' unions has become the normal model; we call this joint venture a "league," but it is important to remember that it is not itself an entity that produces anything - it is simply the collective action of the individual teams.

While structures and practices vary dramatically around the world (thus making it inarguable that there are many different ways for teams to come together to create competitions that are attractive to fans), in the U.S. what has evolved is a single, overarching venture for each major professional sport. There is the NFL for football, the NBA for basketball, the NHL for hockey, and MLB for baseball. While these leagues vary pretty dramatically in many ways in how they are organized and managed, and in the scope and nature of their collective activity, as a general matter they all serve as the collective arm of the member teams in carrying out the activities that the teams choose to collectivize. But in addition, as the league structures have expanded and the leagues have steadily become monopoly structures in their particular sport (the NFL merged with the AFL to create the present monopoly structure in football, and the NBA merged with the ABA to create the counterpart in basketball; the American and National Leagues in baseball absorbed their competitors and joined together in a single, overarching structure called MLB decades earlier, and the NHL grew by internal expansion from its original six teams), the rules of bureaucracy have come into play. In every league, there are teams (which have both individual and collective interests) and there are league employees (who only have collective interests). In every league, there are stronger teams and weaker teams; frequently (but not always) these reflect the size of the markets in which they operate. The result, inevitably, is periodic tension between the stronger teams and the weaker teams. Since there are likely to be more of the latter than the former in any league given the national expansion of every league over time, league officials (whose bureaucratic interests tend to lie in expanding the power and authority of the league) have come to realize that if they can show how the league can help the weaker teams, those teams can likely be counted on to support efforts to expand the collective activity of the league vis-à-vis the individual teams.

This tension - between the independent interests of the stronger teams and the collective interests of the league and its weaker teams - is at the heart of most intra-league disputes today. Whether it involves control over Internet activities, as was one of the major issues in the Rangers litigation with the NHL, or whether interaction with suppliers or licensees such as American Needle will be team by team or collectively through the league, or how the collective bargaining relationship with the union will be handled and what agreements are acceptable - all of these and other tensions are inevitable in a joint venture that, at its core, is merely a tool for otherwise fully independent entities to maximize their individual revenues. If you are the Dallas Cowboys, and have both a strong national fan base and a strong brand, you are more inclined to want to do your own merchandising, and to share a smaller portion of your revenues than, for example, the Nashville Predators of the NHL, which is a small-market hockey team in the southern U.S. with what even it would concede is a much weaker brand than, say, the Montreal Canadiens.

This tension is always there, but the teams realize that the league structure is a useful tool, and so they understandably try to keep disputes internal to the extent possible. But periodically those disputes become public. The Dallas Cowboys have litigated with the NFL; the New York Yankees have litigated with MLB; the Chicago Bulls have litigated with the NBA; and of course, the New York Rangers have litigated with the NHL. The common thread here is strong teams in large markets seeking to hold off increased collectivization through the league structure, driven in significant part by the interests of smaller, weaker teams and the league bureaucracy.

The other end of the spectrum is the American Needle type of dispute - a supplier or licensee who wants to be able to engage in commercial arrangements with individual teams or the league, and finds that the teams have decided they can maximize their revenue by deciding to only negotiate as a group, thus eliminating the existing and potential competition between the individual teams and between the teams and the league. In American Needle , the antitrust challenge was against the NFL's steadily increasing cartelization of the merchandise markets involving trademarked goods from both the teams and the league - first by aggregating the individual team trademarks and licensing them only through the league, and finally by deciding to license only one licensee for particular merchandise. Thus, over time the competition between the teams, and between the teams and the league, to enter into licensing deals with suppliers such as American Needle was steadily diminished and ultimately completely eliminated, to the detriment of both consumers and supplier companies such as American Needle. You can see this kind of effect in merchandising, in advertising, in Internet restrictions of various kinds, and absent constraint by the antitrust laws, likely increasingly in other now-independent activities of the individual teams.

Editor: The argument on behalf of American Needle has been well-documented. How do you see the American Needle SCOTUS opinion affecting the way teams and suppliers pursue disputes against leagues, and how does it change their chances for success?

Nager: American Needle is the end of the "single entity" argument for sports leagues, and means that going forward what had become the standard first line of defense is no longer available. It would be nice to think that this will require members of sports leagues to defend their collective restraints on competition on the merits of the restraint - does it increase competition or decrease it? - and hopefully that will indeed be the case. But antitrust law involves many subsidiary issues as well, such as market definition, and we can expect to see teams, acting through the league, defend their restraints with such arguments as "professional football competes with all other forms of entertainment, and thus an agreement to eliminate competition between the teams in the licensing of their trademarks has no meaningful anticompetitive effect." There will undoubtedly also be arguments that the elimination of competition between the teams is necessary for the success of the league, or to promote competitive balance, or for some other purported reason. It can be expected that the teams and their league ventures will try every argument possible to avoid the merits, since if they ever had to defend many of their collective restraints on the merits - not only on licensing their trademarks, but on restrictions on Internet sales or streaming and the like - it would likely be very difficult indeed to preserve those pretty clearly anticompetitive arrangements.

Of course, outside antitrust attacks are not the only vehicle that could arrest or slow down the increased collectivization of competitive activities by professional sports teams. The internal league tensions between the strong teams and the weak teams will continue to exist, and it would not be surprising to see more litigation between teams and the league structure (which of course really means between some teams and other teams). The league bureaucracy, supported by the weaker teams, will continue to try to aggrandize more authority and control to the league, and the stronger teams will continue to resist this trend. There will almost certainly be more Rangers or Cowboys-type litigation in the future. And in those cases, as in the supplier/licensing cases, the league defendants will no longer be able to assert the "single entity" defense.

Editor: How does American Needle impact future merchandise deals in the NFL and beyond?

Nager: American Needle will encourage further challenges to merchandise deals of the leagues. In rendering its decision, the Court made clear that it did not see collective activity to be a necessity in the context of merchandising. Those deals will now have to be defended on the merits of their competitive effects, and it is hard to see how all of the existing collective agreements could be successfully defended.

Editor: Are there non-sports implications from American Needle for joint venture behavior?

Sims: The principle of American Needle applies to all commercial enterprises. In fact, the combination of Dagher and American Needle provides considerable guidance to antitrust counselors in dealing with the full range of joint ventures. Of course, like virtually every Supreme Court decision, neither opinion nor the two together answer every possible question. But together they do show the way to the correct way of analyzing joint ventures: (1) do the parties currently or potentially compete; if no, there is likely no antitrust issue; (2) if yes, do the pro-competitive effects of the venture outweigh the anticompetitive effects? (3) are all the collective restraints that are part of the venture agreement necessary to the success of the venture; if not, they are suspect under the antitrust laws. From Dagher, we know that the Rule of Reason applies to these analyses, and not the per se rule. From American Needle , we know that these questions have to be asked of every joint venture that is not controlled by a single business, including those where the collective activity is substantial or perhaps even predominate over the individual competitive activity of the venture participants.

Editor: What should teams and suppliers know about their options when engaging counsel in disputes against leagues?

Sims: The considerations here are really no different than in any other legal dispute. If there are antitrust issues involved, you want to know that your lawyers really understand the intricacies of antitrust analysis. As Dagher and American Needle both show, different courts presented with different arguments can come out with different results. Since these issues are of financial significance to the teams and leagues involved, and particularly because they reflect important aspects of the internal dynamics of most leagues, you can expect vigorous opposition, and thus you need good litigators with deep benches. If there are labor-related issues, you need serious labor lawyers - not employment class action litigators, but experts in the limits and constraints of collective bargaining agreements. These will almost always be very tough fights, because in addition to the particular issue involved the ramifications of a loss (like in American Needle ) could extend far beyond the particular fact situation in the litigation. You need to make sure you have the resources necessary to match the legal resources of the leagues and their member teams, which are likely to be substantial.

Editor: Broadcast rights negotiations are a big-dollar part of professional sports. Do you see potential areas of contention here between teams and leagues? Will the rise of streaming media and other new technology raise issues?

Nager: The sports leagues typically try to negotiate exclusive arrangements with media entities - meaning that the leagues negotiate and execute the agreements, and the leagues try to prevent the teams from negotiating separately and making separate arrangements. The Sports Broadcasting Act gave professional sports leagues limited antitrust immunity for arrangements of this type, but only for national broadcast agreements. There is no similar antitrust exemption that covers cable agreements (even national ones), collective restraints on streaming, etc. So it is almost inevitable that there will be litigation challenging what have become fairly ubiquitous collective constraints on independent team activity in these areas. This is likely a hot area for future disputes.

Editor: Are there other areas of sports business where you see possible challenges to league dominance ahead?

Sims: Licensing, merchandising, and the Internet are the most likely ones in the commercial area. "Competitive balance" is another one of those buzz phrases that is used to justify all sorts of collective restraints, but like "single entity," this defense is highly suspect. Just a very surface examination of the wide differences between professional sports leagues in the U.S., not to mention the even larger number of different arrangements in professional sports leagues around the world, makes it obvious that there are many ways to skin this cat, even assuming it needs to be skinned. In fact, exactly how much competitive balance is necessary or even desirable for league success is not at all clear; individual team dominance in various leagues for various periods has not seemed to correlate much with league financial success, and what correlation there is might be positive - the long runs of the New York Yankees in baseball or the Boston Celtics in basketball might have been positive contributors to league success.

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