Wednesday, April 27, 2011

Tom Brady et al. Score on First Drive/Far More To Come

His Opinions May Doom Players' Suit

Yesterday Judge Susan Nelson declined to stay her ruling that enjoined the N.F.L.'s so-called "lockout" of players. Before the lockout, the players and the league were parties to a collective bargaining agreement that contained numerous provisions that would otherwise be deemed horizontal restraints subject to analysis under Section 1 of the Sherman Act, which bans unreasonable restraints of trade. However, provisions that are part of bona fide collective bargaining agreements governing core employment conditions are generally immune from antitrust scrutiny, and the N.F.L. has invoked this "labor exemption" to preclude antitrust review of the various restraints contained in the agreement.

Last month, of course, the players voted to decertify their union, in an effort to end the collective bargaining agreement, avoid the labor exemption, and thus render the league's various restraints subject to the antitrust laws. Thus, the players' post-de-certification complaint alleges that the "lockout" is a concerted refusal to deal by the N.F.L.'s 32 teams, each supposedly an independent business, and that the "lockout" is unlawful per se under Section 1 of the Sherman Act. In particular, the plaintiffs allege that the lockout is an agreement between rivals not to compete for the services of players, an agreement that destroys competition and thus reduces the salaries that players would otherwise receive. The plaintiffs also allege that the lockout is a means of enforcing a price fixing scheme, because the concerted refusal to employ the players will purportedly force the players to accept salaries lower than those that their current contracts require their teams to pay. (See Complaint Paragraphs 117-20).

In addition to the "lockout" claim, the plaintiffs have also challenged the N.F.L. draft and so-called "entering player pool." The draft, it is said, is a horizontal agreement between rivals that allocates to individual firms the exclusive right to negotiate with drafted players, while the "entering player pool" caps the amount that teams will pay rookies. (See Complaint Paragraphs 126-27). The plaintiffs have also challenged the salary cap and the league's restrictions on free agency, again claiming that these rules constitute unlawful horizontal agreements between rivals to reduce competition for players, thereby driving players' salaries below that which a competitive market would set. (See Complaint Paragraphs 132-33).

It should be noted that Judge Nelson did not rule on the merits of any of the plaintiffs' antitrust claims. For one thing, the plaintiffs did not seek to enjoin the draft, entering player pool, salary cap, or restrictions on free agency. Thus, Judge Nelson did not consider the antitrust status of these agreements. Moreover, while the players did seek to enjoin the lockout as a violation of the Sherman Act, the N.F.L. did not, according to Judge Nelson, contest the plaintiffs' claim that the lockout was a concerted refusal to deal/group boycott and a per se violation of Section 1 of the Sherman Act. (See Brady v. N.F.L., at page 83) ("the NFL does 'not contest that their ‘lockout’ is a per se unlawful group boycott and price-fixing agreement in violation of antitrust law.'”) (quoting the plaintiffs' memorandum). Instead, the N.F.L. focused its efforts on arguing that the so-called "non-statutory labor exemption" still barred the plaintiffs' claims despite the players' vote to decertify. Finally, Judge Nelson applied a standard for issuance of a preliminary injunction that merely required the plaintiffs to establish that there was a "fair chance" that they would demonstrate that the lockout violated the Sherman Act (in addition to the other requirements for equitable relief, e.g., a showing that money damages could not fully compensate the plaintiffs) and expressly held that the plaintiffs could meet this standard without showing that success on the merits of the litigation was "likely." (See Brady v. N.F.L., at page 69).

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Thus, as the litigation proceeds, the N.F.L. will presumably challenge the plaintiffs' various antitrust claims with greater vigor. There are, it should be noted, numerous potential arguments in the N.F.L.'s arsenal. The balance of this post will focus on two such arguments.

1. Group Boycotts and Concerted Refusals to Deal are Rarely Unlawful Per Se. The plaintiffs' complaint repeatedly alleges that group boycotts or concerted refusals to deal are unlawful per se, that is, violate Section 1 of the Sherman Act without regard to their actual competitive effect. While this may have been an accurate statement of the law in the 1970s, the legal landscape has changed significantly since then. For one thing, the Supreme Court has greatly narrowed the scope of any such per se rule. In 1985, the Court declined to condemn as unlawful per se a group boycott that was ancillary to an otherwise legitimate joint venture. See Northwest Wholesale Stationers v. Pacific Stationery, 472 U.S. 284 (1985). Both before and after the Northwest Wholesale Stationers decision, lower courts rejected a blanket per se rule against group boycotts/concerted refusals to deal. See Rothery Storage v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986) (group boycotts generally analyzed under the Rule of Reason); United States Trotting Association v. Chicago Downs Ass'n, 665 F.2d 781 (7th Cir. 1981) (en banc) (group boycotts by self-regulating sports associations are properly analyzed under the Rule of Reason). As Judge Posner explained more than three decades ago, concerted refusals to deal are generally self-help methods of enforcing other rules or practices and thus cannot be analyzed in a vaccuum. See R. Posner, Antitrust Law 207 (1976). Thus, instead of focusing on the challenged boycott or refusal to deal itself, courts should instead focus on the underlying rule or practice the boycott or refusal to deal is seeking to enforce. Indeed, this seems to be the approach taken by the Supreme Court in NCAA v. Bd. of Regents of the University of Oklahoma, 468 U.S. 84 (1984). There, the University of Georgia and the University of Oklahoma challenged the NCAA's collective refusal to deal with schools that declined to adhere to the league's horizontal restrictions the prices and output of game broadcasts. The district court found, inter alia, that the NCAA had engaged in an unlawful group boycott. However, no Justice on the Supreme Court argued that the threatened exclusion of Oklahoma and Georgia from the NCAA was unlawful per se. Instead, the Court, in an opinion authored by Justice Stevens (pictured above) analyzed the underlying restraints on price and output that the league was seeking to enforce, found that such restraints were properly judged under the Rule of Reason and condemned them as unreasonable restraints.

This is not to say that all concerted refusals to deal should be analyzed under the Rule of Reason. Some may well be "naked," that is, not efforts to enforce a rule or practice that might otherwise be valid. Some, however, seem plainly ancillary to other agreements that are themselves properly analyzed under the Rule of Reason. Take the N.F.L. draft, whereby the league allocates to a particular team the exclusive right to negotiate with a player the team has drafted. While this rule is admittedly the result of horizontal concerted action, courts nonetheless properly analyze it under the Rule of Reason. (See below). Proof that teams have enforced this provision via a group boycott should not short-circuit the process of determining whether or not the draft enhances or detracts from economic welfare.

2. Several Challenged Restraints Will Avoid Per Se Condemnation and Are Thus Properly Analyzed Under the Rule of Reason. Plaintiffs have also claimed that various restraints they have challenged are unlawful per se or otherwise unreasonable. For instance, the plaintiffs argue that the draft system combined with the entering player pool, which limits the salaries paid rookies, is itself unlawful per se, and, in the alternative, unreasonable. In support of this argument, the plaintiffs cite Smith v. Pro Football, Inc., 420 F. Supp. 738 (D.D.C. 1978). The plaintiffs also claim that the salary cap and various restrictions on free agency are unlawful per se price fixing and that, in any event, such restrictions are unreasonable because the defendants possess market power and the restrictions "are not necessary to achieve any procompetitive objective." (See Complaint Paragraph 133).

However, the N.F.L. will have little to fear from decisions like Smith, and the sort of reasoning that informed that decision and others from that era. When Smith was decided, horizontal agreements were automatically unlawful per se, even when such restraints were ancillary to otherwise lawful joint ventures by small market participants. The classic case in point was United States v. TOPCO, 405 U.S. 596 (1972), where the Supreme Court condemned as unlawful per se ancillary restrictions on horizontal rivalry between small grocery chains that had formed a cooperative venture to create private label products for the members' stores. Indeed, the Court condemned the restraints despite the trial court's finding that the members would not have formed the venture without the restraints, which limited free riding by venture participants and thus encouraged individual venture partners to promote the venture product. (I discuss the trial court's findings and the TOPCO decision at pages 469-71 of this article in the Antitrust Law Journal.)

There is no doubt that a straight-forward application of TOPCO supports decisions like Smith. And, if TOPCO were still good law, the NFL would be hard-pressed to avoid per se condemnation of its restraints. However, the Supreme Court subsequently refused to apply TOPCO in the context of sports leagues, and other subsequent developments suggest that courts would reject per se condemnation of the restraints the players have challenged in favor of a forgiving Rule of Reason.

In NCAA, mentioned above, the Court evaluated the NCAA's restrictions on: (1) the number of college football games that networks could televise, (2) the number of times each school could appear on television and (3) the prices schools could charge a network for the right to televise its games. The Court acknowledged that application of TOPCO would require per se condemnation of the challenged restraints which reduced output and increased prices "on their face." Nonetheless, the Court declined to condemn the restraints as unlawful per se, because, it said, some horizontal limitations on rivalry --- though not necessarily those before the Court --- were necessary for college football to exist in the first place. Such restrictions included limitations on how much colleges could pay athletes, requirements that student athletes attend class, limitations on the number of scholarships a school could provide, and agreements on the rules teams would observe on the field. Such horizontal restrictions on unbridled rivalry, including restrictions on the price that schools would pay for players services were, the Court said, presumptively reasonable because they likely enhanced the quality of the product offered by the NCAA and thus enhanced interbrand competition with other entertainment options.

Thus, NCAA stands for the straight-forward proposition that horizontal restraints --- even explicit restraints on price or output --- imposed by a sports league are judged under the Rule of Reason. Indeed, such Rule of Reason treatment applies without regard to whether the defendant can offer a plausible redeeming virtue that such restraints might produce. Indeed, the Supreme Court expressly reaffirmed this reasoning, albeit in dicta, in the context of professional sports in its recent decision, also authored by Justice Stevens, in American Needle v. N.F.L. (May 24, 2010).

Indeed, the case for Rule of Reason treatment is stronger in the current case than it was in NCAA. Separate and apart from NCAA's special rule for sports leagues, post-TOPCO decisions have emphasized that Rule of Reason treatment of challenged restraints is the norm, and that courts should only condemn restraints as unlawful per se if such agreements are: (1) always or almost always anticompetitive and (2) also always or almost always lack redeeming virtues. See Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1978) (citing Northern Pacific Ry. v. United States, 356 U.S. 1 (1958)). As already noted, the NCAA Court did not identify any possible redeeming virtues that the restraints challenged there may have produced; a straight-forward application of the test for per se illegality would have required condemnation of such restraints. Not so for the restraints the players are challenging here. While horizontal restrictions like the draft and limits on free agency are "always or almost always anticompetitive" within the meaning of this test, they nonetheless avoid per se condemnation because they may produce redeeming virtues. Indeed, for several decades now, economists and legal scholars have recognized that unbridled rivalry can lead to a market failure and thus a non-optimal allocation of resources. Indeed, Oliver Williamson recently earned a Nobel Prize for work building on the foundation laid by Ronald Coase explaining how non-standard contracts, once viewed with suspicion by economists and antitrust courts alike, generally reduce transaction costs and overcome market failure, thereby enhancing economic welfare. The innumerable horizontal restraints adopted by sports leagues are no exception. (I explain both the historical hostility to such restraints and the Williamson/Coase interpretation of such agreements on pages 113-44 of this 2003 article in the Illinois Law Review.) For instance, the draft and limitations on free agency, while limiting unbridled rivalry for player talent, help ensure "competitive balance" by preventing the richest teams in the league from buying up all of the best talent and thus predictably winning each game. In fact, the American Needle decision expressly recognized, albeit in dicta, that maintenance of competitive balance is a bona fide objective that can justify otherwise unlawful horizontal restraints. The plaintiffs themselves seem to recognize that the challenged restraints can produce benefits, as they merely argue that the restraints are not necessary to produce such benefits, that is, that the restraints produce benefits that could be achieve via other means that the plaintiffs do not specify.

None of this is to say that all challenged restraints will survive; the mere fact that a restraint produces benefits does not automatically protect the restraint from condemnation. Courts must nonetheless "weigh" or "balance" such benefits against any harms the restraints produce. Nonetheless, once courts decide to evaluate such restraints under the Rule of Reason, the plaintiffs will bear the initial and substantial burden of proving that the restraints produce actual anticompetitive harm, a burden that plaintiffs rarely satisfy. (Though, satisfying this burden may be easier in this context, given the N.F.L.'s strong market position.) Moreover, once defendants show that challenged restraints produce benefits, plaintiffs generally fail to convince courts that a restraint's harms outweigh its benefits. Thus, despite their strong start, plaintiffs' antitrust action may stall in the red zone, or even earlier.