Requiem for a Lightweight: How NCAA Continues to Distort Antitrust Doctrine, 56 Wake Forest L. Rev. _____ (2021) (forthcoming)

To download the latest version of this paper, go to this link.  

Abstract

The Supreme Court speaks rarely about the meaning of the Sherman Act.  When the Court does speak, its pronouncements have particular resonance and staying power among jurists, scholars and enforcers.  NCAA v. Board of Regents of the University of Oklahoma was such a case.  There the Court assessed agreements reducing the output and increasing the prices of televised college football games.  After announcing that restraints imposed by sports leagues are exempt from per se condemnation, the Court went on to invalidate the challenged agreements under the Rule of Reason because they produced significant economic harm without offsetting benefits.  In so doing the Justices also addressed restraints not before the Court, opining that members of the NCAA may collectively restrict the level of compensation that universities provide student athletes. 

Announced almost four decades ago, NCAA and its rationale have exerted substantial influence on Sherman Act doctrine, enforcement policy and scholarly discourse well beyond the context of sports leagues.  Later this term, in NCAA v. Alston, the Court will revisit the antitrust propriety of collective limitations on the compensation schools pay student athletes.  There the Court will review the Ninth Circuit’s condemnation of NCAA regulations restricting the value of education-related benefits, such as post-graduation scholarships, that schools provide student athletes in addition to tuition, room, board and other costs of attendance. 

While antitrust scholars and practitioners disagree about the merits of the Ninth Circuit’s decision, all hope the Court will clarify the extent to which the NCAA may limit student athlete compensation.  This essay contends that Alston also presents the Court with an opportunity to address more fundamental questions.  That is, the case offers the Court a chance to correct NCAA’s erroneous application of the per se standard and derivative errors the Court committed when conducting rule of reason analysis, errors that reverberate throughout Sherman Act jurisprudence.

  In particular, the essay demonstrates that NCAA’s sports league exemption from the ordinary per se standard contradicts basic antitrust principles.  Moreover, the rationale for the exemption turned partly on the Court’s (correct) assertion that some horizontal restraints can overcome market failures and enhance interbrand competition.  Recognition of these potential benefits undermined the Court’s otherwise broad articulation of the per se rule that purportedly created the need for such an exemption in the first place. 

  Failure to condemn the restraints before it as unlawful per se also distorted the Court’s pronouncements regarding how to conduct rule of reason analysis.  For instance, the requirements for establishing a prima facie case should depend upon the nature of redeeming virtues a restraint might produce.  However, courts, agencies and scholars have read NCAA as holding that proof that a restraint produces prices exceeding the non-restraint baseline necessarily establishes such a case, even when the restraint may overcome a market failure.  Moreover, lower courts, agencies and the Court itself have read NCAA as endorsing a “Quick Look” approach in some rule of reason cases, allowing plaintiffs to bypass any requirement to establish anticompetitive harm.  Finally, the Court’s approach to rule of reason analysis lent credence to the dubious assumption that benefits produced by challenged restraints necessarily coexist with harms, bolstering the equally dubious less restrictive alternative test.  Hopefully, the Court will take this opportunity in Alston to correct these errors and ensure a more coherent Section 1 jurisprudence that better reflects the teachings of modern economic theory.

Happy Birthday to the Sherman Act!

Had a Good Ghost Writer

Said Ghost Writer

The Sherman Act, ostensibly authored by Senator John Sherman (R-Ohio) (pictured first above), turned 125 today.   The Senate passed the Act 51-1 on April 8, 1890, and the House followed suit unanimously on June 20.  President Harrison signed the bill into law on this date in 1890.  For a photo of the Act, go here.  

While the Act contains eight sections (see the complete text reproduced below), the statute's basic prohibitions are found in the first two. Thus, Section 1 forbids: "contracts, combinations and conspiracies in restraint of trade or commerce among the several states."  Section 2 forbids "monopolization," "conspiracy to monopolize," and "attempt[s] to monopolize."  Senator George F. Edmunds (R-Vermont) (pictured second above), Chairman of the Senate Judiciary Committee, drafted these two sections in late March and early April, 1890, narrowing Sherman's pending draft, which exceeded the scope of the commerce power.  See Martin J. Sklar, The Corporate Reconstruction of American Capitalism, 115 & n. 59  (1988).

Although the Supreme Court initially held that Section 1 merely prohibits "direct restraints" of interstate commerce, see United States v. Joint Traffic Association, 171 U.S. 505 (1898), it would subsequently hold that Section 1 bans all "unreasonable" restraints.  See Standard Oil v. United States, 221 U.S. 1 (1911), while Section 2 only forbids unreasonable methods of acquiring or maintaining a monopoly.  See American Tobacco Co. v. United States, 221 U.S. 106 (1911).  These three limiting constructions ensured that the Act did not interfere with liberty of contract, thereby assuring that the statute banned only those practices that reduce wealth. (See here and here.)  While once controversial, Standard Oil's "Rule of Reason" survives to this day as the definitive construction of the Act.  

The Act has proved remarkably resilient, in part because of the Rule of Reason's flexibility.  To be sure, Congress has exempted various industries from the Act.  Moreover, Congress partially suspended the Act when it passed FDR's National Industrial Recovery Act in 1933.  Under the NIRA, President Roosevelt approved over 500 so-called "Codes of Fair Competition," limiting competition in each such industry.  Fortunately the Supreme Court unanimously invalidated the NIRA in Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935), restoring the Sherman Act.  Thus, the operative language of Sections 1 and 2 survives, protecting markets from wealth-reducing restraints.

As promised above, here is the text of the original Sherman Act:

An act to protect trade and commerce against unlawful restraints and monopolies.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

Sec. 1. Every contract, combination in the form of trust or other- wise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, at the discretion of the court.

Sec. 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof; shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 3. Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any Territory of the United States or of the District of Columbia, or in restraint of trade or commerce between any such Territory and another, or between any such Territory or Territories and any State or States or the District of Columbia, or with foreign nations, or between the District of Columbia and any State or States or foreign nations, is hereby declared illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.

Sec. 4. The several circuit courts of the United States are hereby invested with jurisdiction to prevent and restrain violations of this act; and it shall be the duty of the several district attorneys of the United States, in their respective districts, under the direction of the Attorney-General, to institute proceedings in equity to prevent and restrain such violations. Such proceedings may be by way of petition setting forth the case and praying that such violation shall be enjoined or otherwise prohibited. When the parties complained of shall have been duly notified of such petition the court shall proceed, as soon as may be, to the hearing and determination of the case; and pending such petition and before final decree, the court may at any time make such temporary restraining order or prohibition as shall be deemed just in the premises.

Sec. 5. Whenever it shall appear to the court before which any proceeding under section four of this act may be pending, that the ends of justice require that other parties should be brought before the court, the court may cause them to be summoned, whether they reside in the district in which the court is held or not; and subpoenas to that end may be served in any district by the marshal thereof.

Sec. 6. Any property owned under any contract or by any combination, or pursuant to any conspiracy (and being the subject thereof) mentioned in section one of this act, and being in the course of transportation from one State to another, or to a foreign country, shall be- forfeited to the United States, and may be seized and condemned by like proceedings as those provided by law for the forfeiture, seizure, and condemnation of property imported into the United States contrary to law.

Sec. 7. Any person who shall be injured in his business or property by any other person or corporation by reason of anything forbidden or declared to be unlawful by this act, may sue therefor in any circuit court of the United States in the district in which the defendant resides or is found, without respect to the amount in controversy, and shall recover three fold the damages by him sustained, and the costs of suit, including a reasonable attorney's fee.

Sec. 8. That the word "person," or " persons," wherever used in this act shall be deemed to include corporations and associations existing under or authorized by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country.

O'Bannon, the Rule of Reason, and the Less Restrictive Alternative Test

Applied Reason to College Athletics

Earlier this year, in O'Bannon et al. v. NCAA, the U.S. District Court for the Northern District of California invalidated the NCAA's policy governing compensation that colleges and universities may provide football and basketball players. (Here is a link to the decision.)  That policy allowed schools to provide players a full grant-in-aid, namely, full tuition, fees, room and board, and the cost of textbooks.  Moreover, the policy also allows schools to provide additional compensation to the neediest student athletes --- those who qualify for federal Pell grants.   

Ordinarily, agreements between rivals regarding the compensation paid to input suppliers are unlawful per se.  Ditto for agreements that govern non-price aspects of the relationship between rivals and input suppliers.  If Ford, Toyota, Honda and General Motors agreed on the salaries or working conditions provided their engineers, for instance, courts would rightly declare the arrangement a buyers' cartel and condemn it as unlawful per se under the Sherman Act.  Ditto if, say, several silicon valley firms or an academic trade association agreed not to hire or "poach" individuals employed by rivals. 

In NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984), the Supreme Court rejected the analogy between the NCAA's policy on player compensation and the sort of buyers' cartel just described.  As explained in much greater detail here, the Court, in an opinion by Justice John Paul Stevens (pictured above), recognized that, unlike buyer cartels, the NCAA is a legitimate joint venture, the existence of which is necessary to produce a product, college football, that many consumers find attractive.  The Court also recognized that unbridled rivalry between colleges and universities for student-athletes would transform college athletics into semi-pro athletics, thereby undermining consumer demand for the joint venture product.  Thus, the Court expressly noted that, in order to protect the integrity of this product, members of the NCAA must collectively set limits on player compensation.  In so doing, the Court rejected the "cartel" label for such restraints.  (For additional discussion of the NCAA decision by this blogger, go here.) According to the Court:

"The identification of this 'product' with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable such as, for example, minor league baseball.  In order to preserve the character and quality of the 'product,' athletes must not be paid, must be required to attend class, and the like.  And the integrity of the 'product' cannot be preserved except by mutual agreement: if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the field of play might soon be destroyed.  Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as result enables a product to be marketed which might otherwise be unavailable.  In performing this role, its actions widen consumer choice --- not only the choices available to sports fans but also those available to athletes -- and hence can be viewed as procompetitive."

See NCAA, 468 U.S. at 101-102 (emphasis supplied).  

More technically, the Court essentially held that unbridled competition between NCAA member schools to attract and retain student athletes would result in a market failure and reduce economic welfare, including the welfare of consumers.  Such rivalry, one suspects, could result in six figure salaries for some players at some schools, over and above a full grant-in-aid.  The prospect of such a market failure, the Court believed, distinguished the NCAA's limits on player compensation from otherwise analogous forms of collective wage setting such as the hypothetical agreements between automobile manufacturers mentioned above.  (See this essay by this blogger explaining the role of the market failure paradigm in the antitrust jurisprudence of Justice Stevens, including his opinion in NCAA.) 

The NCAA court did not hold that agreements governing student-athlete compensation are lawful per se.  Instead, such agreements are to be analyzed under Standard Oil's Rule of Reason. After conducting this analysis, the district court in O'Bannon agreed with the NCAA (and the Supreme Court) that the NCAA's limits on student-athlete compensation produce significant procompetitive benefits by, for instance, enhancing consumer demand for college football and basketball.  These benefits, the court apparently assumed, would suffice to justify the restraints.   Nonetheless, the court invalidated the limits, holding that a "less restrictive alternative" would achieve the same benefits.  In particular, the court held that increasing the limit to "cost of attendance" (which includes grant-in-aid plus transportation and supplies), plus $5,000 per year, to be derived from "licensing revenue generated from the use of their names, images, and likenesses during college[,]" would be "less restrictive of competition, while at the same time achieving the same admitted benefits as the current policy.

This blogger has joined a brief amicus curiae by fifteen antitrust scholars taking issue with the district court's application of the less restrictive alternative test.  (Here is a link to the brief.  See here for a story about the brief on CBSSPORTS.com ) The brief does not question the role that a properly-applied less restrictive alternative analysis can play in rule of reason analysis.  At the same time, the brief contends that the district court misapplied this test.

Ordinarily the less restrictive alternative test involves identification of a different type of agreement, actually existing somewhere in the marketplace, that produces the same benefits as the agreement under scrutiny.  Thus, in the context of product distribution, courts evaluating vertically-imposed exclusive territories could conceivably conclude that so-called "location clauses" are less restrictive of competition and produce the same benefits in a particular setting as exclusive territories.  Cf. Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (describing location clause and holding that courts should evaluate such restraints under the rule of reason).  However, the O'Bannon court did not identify any such categorically different alternative actually existing in the marketplace.  Instead,  the court simply amended somewhat (upward) the level of compensation that players can potentially receive, without questioning the need for a collectively-set limit on such compensation.

Not surprisingly, then, the brief argues that the district court improperly treated the less restrictive alternative test as a license to substitute its own judgement about appropriate compensation for the judgment of market participants who adopted policies that, according to the court's own findings, produced significant economic benefits. Thus, the district court's approach empowers judges to function as regulatory commissions, recalibrating otherwise reasonable levels of compensation.  Such quasi-regulators would displace beneficial agreements that produce significant economic benefits, simply because the judge believes that a hypothetical variant of the agreement, in this case one involving somewhat higher compensation for some players, would produce marginally greater net benefits than the agreement the parties actually adopted.  However, as Judge Frank Easterbrook --- who argued NCAA for the defendants -- once explained when applying the rule of reason in a subsequent case: "the antitrust laws do not deputize district judges as one-man regulatory agencies."   See Chicago Professional Sports Ltd. Partnership and WGN v. National Basketball Association, 95 F.3d 593, 597 (7th Cir. 1996).  Instead, courts must simply ask whether a restraint is "reasonably necessary" to produce the benefits in question.   Hopefully the Ninth Circuit will agree with Judge Easterbrook and properly apply the rule of reason that has, thanks to NCAA and Justice Stevens, been applicable to such restraints for the past three decades.

Update:

Yesterday the U.S. Supreme Court granted certiorari in NCAA v. Alston, No. 20-512.  (See the SCOTUSblog entry for the case here.)  In Alston, the Ninth Circuit invalidated the NCAA's restrictions on the education-related benefits member institutions may offer student-athletes.  The petition seeking such review contends that O'Bannon "disrupted the judicial consensus" reached in other federal courts regarding how to assess restraints adopted by sports leagues, both amateur and professional.  (See petition at 11).  The petition also contends that, in Alston, the Ninth Circuit went "far beyond O'Bannon," by holding that "virtually all NCAA rules limiting so-called 'education-related benefits' are invalid." (See petition at 4).  The Supreme Court has not yet set the schedule for briefing and oral argument, but we can expect a decision by the end of this Supreme Court term, namely, early July, 2021.  Resolution of this controversy will require the Court to revisit its previous statements, convincing to this blogger, that unbridled rivalry between NCAA members for the recruitment and retention of student athletes would result in a market failure that undermines the integrity of the product that this joint venture offers to consumers.  The prospect of such a market failure, of course, would save such restraints from per se condemnation, because of the possibility that such restraints will produce redeeming virtues.  If the Court does reiterate this conclusion, it will presumably move on to provide additional guidance regarding how to conduct a fact-intensive assessment of such restraints under the Sherman Act's Rule of Reason.

 

How to Monitor Apple's Monitor

Suspicious of Monitors

 

Section 1 of the Sherman Act forbids "contracts in restraint of trade or commerce among the several states," while Section 2 forbids  "monopolization" and "attempts to monopolize."  The Act also requires the Department of Justice to enforce the Act, by seeking, where applicable, equitable and legal relief in U.S. District Courts against firms and individuals who have violated the Act's provisions.  It appears that the Department may have used this authority to impose, no doubt inadvertently, the very type of monopoly pricing the Sherman Act was designed to prevent.

This last July the United States prevailed in a civil suit that challenged Apple's alleged agreements with book publishers to maintain e-book prices above the levels that unbridled competition would produce.  Among other forms of relief, the United States sought and obtained from the U.S. District Court for the Southern District of New York the appointment of a so-called "External Compliance Monitor," in addition to a new "Internal Compliance Officer," both, of course, at Apple's expense.  The final judgment requiring these appointments did not provide for competitive bidding to set the fees of either monitor but instead simply provided that the monitors would charge a "reasonable" fee. 

In paper's filed the day before Thanksgiving, Apple informed the court that the External Monitor, charged with ensuring that Apple comply with the antitrust laws, is himself charging Apple $1,100 per hour, as well as an "administrative fee" of fifteen percent, for a total of $1265 per hour.  Apple claims that it has never paid such high legal fees.  (See here for a more detailed summary of Apple's objections.)

If Apple's assertions are correct, the government's insistence on such a monitor on the terms described above is supremely ironic.   After all, as explained in previous posts (see  here and here), the whole point of the Sherman Act and its Rule of Reason as articulated in Standard Oil v. United States, 221 U.S. 1 (1911) is to prevent contracts (Section 1) or other practices (Section 2) that produce or maintain monopoly or the consequences of monopoly, without any offsetting efficiency benefits.  These consequences, of course, include prices above those that a competitive market would produce.  By winning the appointment of an External Monitor, against Apple's will and without competitive bidding, the Department of Justice has created conditions conducive to the very sort of competitive harm the Sherman Act was designed to prevent.  To be sure, the monitor's fees cannot themselves violate the Sherman Act, which only regulates "trade or commerce among the several states."  Like the Commerce Clause itself, the Act assumes the existence of pre-existing commerce  that parties might restrain. (See also here and here).  The District Court's coercive (but apparently legal) requirement that Apple purchase legal services against its will does not seem to qualify as such commerce.  Moreover, the terms of the final judgment would authorize Apple to seek a judicial determination that the External Monitor's fee is unreasonable.    However, as William Howard Taft explained long ago in his most famous judicial decision, see Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898) (Taft, J.),  judicial oversight of pricing decisions is a poor substitute for the determination of such prices by a competitive market, there competitive bidding by pipe producers.  Judges who take on this task, Taft said, "set sail on a sea of doubt," and rely upon their own "vague and varying opinions" regarding "how much, based on principles of political economy, men ought to be allowed to restrain competition."  See id. at 282-84.  See also National Society of Professional Engineers v. United States, 435 U.S. 679, 692-94 (1978) (describing competitive harm resulting from horizontal agreement not to engage in competitive bidding).

This Blogger has no doubt that the court-appointed External Monitor is a superb attorney who is highly-qualified to perform the duties described in the final judgment.  Moreover, there is no indication that, in setting his fee, the External Monitor has acted in anything other than complete good faith.   Nonetheless, as the Roman poet Juvenal (pictured above) asked, admittedly in a different context, "sed quis custodient ipsos custodes," viz. "who will monitor the monitors themselves?"  The best such monitor, as William Howard Taft explained, is competition.     

Supreme Court Fails to Defend "Competition on the Merits"

Standing Alone (and Wrong)

This most recent term, the Supreme Court passed up a significant opportunity both to clarify an important facet of antitrust doctrine and to correct an erroneous decision of the Third Circuit Court of Appeals.    See ZF Meritor v. Eaton, 696 F.3d 254 (3d Cir. 2012).  The result will be antitrust doctrine that discourages the most efficient allocation of resources, at least by those enterprises potentially subject to litigation in the Third Circuit.

Eaton was an admitted monopolist of the market for heavy duty ("HD") transmissions, an important feature of tractor trailers manufactured by Volvo, Freightliner and two other firms, so-called "Original Equipment Manufacturers" or "OEMs."  ZF Meritor, a joint venture between Meritor and Germany's  ZF Friedrichshafen AG,  entered the market, vying for sales to OEMs.   After ZF Meritor's entry, Eaton adopted a new pricing policy, a policy that promised significant discounts to OEMs that purchased a stipulated share of their HD transmission requirements from Eaton.  OEMs repeatedly met these market share targets, purchasing up to 92 percent of their requirements from Eaton, and Eaton provided the promised discounts.  ZF Meritor's share of the market shrunk accordingly, and, unable to earn a profit while meeting Eaton's prices, the venture exited the market.

After exiting the market, ZF Meritor filed an antitrust suit against Eaton.  The suit claimed, among other things, that Eaton's policy of granting market share discounts to OEMs constituted unlawful exclusionary conduct contrary to Section 2 of the Sherman Act.  Importantly, ZF Meritor did not allege that Eaton's prices were below any measure of cost.  Nor did the firm claim that Eaton had entered exclusive dealing agreements with any of the OEMs.  Instead, ZF Meritor essentially conceded that it could not match Eaton's prices and remain profitable because the latter had achieved significant efficiencies and thus lower unit costs than ZF Meritor, perhaps because of its large scale.  In other words, ZF Meritor sought damages from Eaton because the latter employed fewer resources to build HD transmissions than ZF Meritor, thereby freeing up resources for use elsewhere and enhancing national productivity. 

This brief amicus curiae, signed by this blogger and several other antitrust scholars, explained how ZF Meritor's failure to allege below-cost pricing should have doomed its case under long-standing precedent.   Both the Supreme Court and various lower courts have repeatedly held that "competition on the merits" is lawful per se, even if such competition results in or protects a monopoly and ultimately results in higher prices.  The realization of efficiencies and resulting above-cost pricing is the paradigmatic example of such lawful competition.   (See pp. 690-715 of this article for an exegesis of the case law on this topic.)  As Justice Brennan explained for the Supreme Court more than two decades ago, "[i]t is in the interest of competition to permit dominant firms to engage in vigorous competition, including price competition."  See Cargill v. Monfort, 479 U.S. 104, 116 (1986).   Banning such pricing at the behest of less efficient competitors would preserve inefficient rivals and  prevent firms from realizing productive efficiencies and thereby making more effective use of the nation's scare resources.   It's no surprise, then, that both mainstream schools of antitrust thought, Harvard and Chicago, have rejected antitrust rules that would condemn above-cost pricing. 

In the face of such precedent, the Third Circuit nonetheless sustained a jury verdict against Eaton.  In particular, the Third Circuit held that Eaton's pricing practices, described above, constituted "de facto exclusive dealing" and thus excluded ZF Meritor from the marketplace on some basis other than efficiency.  The court admitted, as it had to, that no OEM was legally obligated to purchase a single HD transmission from Eaton, let alone bound to purchase HD transmissions exclusively from the firm.  Nonetheless, the court opined that no OEM could survive without purchasing some transmissions from Eaton and that Eaton had the contractual right to refuse to sell such transmissions to any or all OEMs.  See Eaton, 696 F.3d at 282-83 (observing that Eaton had the contractual right to refuse to sell HD transmissions to each OEM and that  “no OEM could satisfy customer demand without some Eaton products.”)   Moreover, as the Third Circuit conceded, Eaton never declined to deal with any OEM or threatened to do so.  See Eaton, 696 F.3d at 282-83 and n. 15.  Nonetheless, the Third Circuit held that the mere possibility that Eaton might do so, combined with the prospect of obtaining market share discounts, effectively coerced OEMs into purchasing most of their requirements from Eaton and thus constituted the economic equivalent of an actual exclusive dealing agreement.  See id.  As a result, the court affirmed the jury's verdict, which rested upon a finding that the defendant's conduct had an unreasonable impact on competition, even though Eaton never priced below cost.  In so doing, the court ignored the Harvard/Chicago consensus described above.

The Third Circuit's equation of Eaton's conduct with actual exclusive dealing, subject to a rule of reason analysis, contravenes both Supreme Court precedent and sound antitrust policy.  As explained in this article,  "competition on the merits" depends upon the recognition of strong property rights.  Thus, for instance, a firm that realizes efficiencies need not share its know-how or facilities with others and must be allowed to charge what the market will bear.  It's no surprise, then, that the Supreme Court has repeatedly held that manufacturers may generally refuse to sell their products to others and that such a refusal  does not thereby establish a contractual restraint between the manufacturer and those who wish to purchase the manufacturer's products.  See e.g.  Verizon Communications, Inc. v. Law Offices of Curtis Trinko, 540 U.S. 398 (2004); United States v. Colgate, 250 U.S. 300, 307-308 (1919).  A fortiori, Eaton's right to refuse to deal, which it never exercised or threatened to exercise, did not thereby transform its unilateral pricing policy into an exclusive dealing agreement, de facto or otherwise, as each OEM remained contractually free to purchase as many transmissions from Eaton’s rivals as it wished.  Such contractual freedom constituted the very antithesis of an unreasonable contractual restraint.

To be sure, a monopolist’s unilateral refusal to deal can, in narrow circumstances, violate Section 2 of the Sherman Act, despite the absence of any accompanying agreement.  See Trinko   (rejecting such a claim).     Not surprisingly, ZF Meritor did not argue that Eaton’s conduct satisfied the stringent test for establishing an unlawful refusal to deal, as such a claim would have been baseless.  Instead, both ZF Meritor and the Third Circuit sought to transform two purely lawful practices — above cost pricing and an unexercised right to cease dealing — into one unlawful practice, called “de facto partial exclusive dealing.”  

The Third Circuit’s doctrinal alchemy would, if consistently applied, sweep too broadly and undermine antitrust law’s strong preference for price-based “competition on the merits.”  Under this test, any monopolist that offered discounts that disadvantaged rivals could be subject to liability for "de facto exclusive dealing."    After all, every monopolist is (by definition)  a “dominant supplier,” without whose products some firms might not survive.  As Thom Lambert has explained at Truth on the Market, reliance on this basic economic truism to support a finding of “de facto exclusive dealing” would necessarily require courts to condemn each and every system of market share discounts that prevented rivals from penetrating a monopolist’s market, unless, perhaps, the monopolist could establish, at trial, that the practice was the least restrictive means of generating efficiencies. Such a result would contravene the Supreme Court’s repeated pronouncements that antitrust laws protect competition — including price competition by monopolists — and not individual competitors.

To be sure, monopoly sellers may employ discounts to induce purchasers to enter exclusive dealing contracts, be they beneficial, harmful, or some combination of both.  Indeed, as explained in this article, sellers with little or no market power often employ cost-based discounts to induce acceptance of non-standard agreements, many (but not all) of which produce significant benefits.  However, a rule that subjects a monopolist's discounts to fact-intensive Rule of Reason scrutiny would ignore a critical distinction between market share discounts and other forms of discounts, on the one hand, and actual exclusive dealing, on the other.  After all, competitive rivalry does not take place in a vacuum, but instead reflects the influence of various background rules of contract, property and tort, rules that form what Ronald Coase called the Institutional Structure of Production.   As Coase explained, different sets of background rules can induce different allocations of resources and thus alter the content of society's output.  It therefore stands to reason that courts should take account of these background rules when fashioning antitrust doctrine.

In particular, attention to these rules reveals that actual exclusive dealing agreements have legal consequences that prevent a monopolist’s rivals from themselves engaging in merits-based competition.  For instance, a customer that breaches an exclusive dealing contract would have to pay a monopolist damages caused by such a breach.  Moreover, a new entrant or incumbent rival that knowingly employs discounts to induce customers to breach their exclusive dealing contracts with a monopolist thereby commits tortious interference with contract, exposing itself to liability for compensatory and even punitive damages.  See Restatement (Second) of Contracts, Section 766.  Thus, actual exclusive dealing agreements between Eaton and the OEMs could have solidified Eaton's monopoly for reasons unrelated to efficiency and thus, perhaps, prevented the most efficient allocation of resources.

Where there is no such agreement, however, rivals are perfectly free, as was ZF Meritor, to offer their own discounts in an effort to wrest customers away from the monopolist.  If successful, such a strategy would have no legal consequences whatsover, as substituting ZF Meritor's products for those produced by Eaton would not breach any obligation, contractual or otherwise.  (Any suit by Eaton for tortious interference with prospective economic advantage would fail, as ZF Meritor's discounts would not have resulted in breach of an actual agreement and would not otherwise constitute "improper" means of interference with Eaton's ability to retain OEMs' patronage.)  See Restatement (Second) of Contracts, Section 767.)   That is how competition is supposed to work.  Given these background rules, ZF Meritor's failure to do wrest more business from Eaton, far from reflecting the binding force of an exclusionary contract (backed up by the threat of tort liability), is instead  prima facie evidence that Meritor's costs were higher than those of the Eaton.  Imposition of liability in such circumstances will necessarily thwart the result of legitimate competition and destroy wealth. 

 

Happy Birthday, Ronald Coase

102 Years Young

This Blogger wishes Ronald Coase, Professor Emeritus at the University of Chicago Law School, a happy birthday.  Born in 1910, Coase is 102 years old today.  As many readers know, Coase received the Nobel Prize in Economic Sciences in 1991.  Here is an excerpt from the Royal Swedish Academy's Press Release announcing the award:

"Coase showed that traditional basic microeconomic theory was incomplete because it only included production and transport costs, whereas it neglected the costs of entering into and executing contracts and managing organizations.  Such costs are commonly known as transaction costs and they account for a considerable share of the total use of resources in the economy.  Thus, traditional theory had not embodied all of the restrictions which bind the allocations of economic agents.  When transaction costs are taken into account, it turns out that the existence of firms, different corporate forms, variations in contract arrangements, the structure of the financial system and even fundamental features of the legal system can be given relatively simple explanations.  By incorporating different types of transaction costs, Coase paved the way for a systematic analysis of institutions in the economic system and their significance."

Coase’s work is the foundation of what modern scholars call “Transaction Cost Economics “ (“TCE” for short).  Coase began that work in 1937, with his now famous article “The Nature of the Firm.” As explained in a previous post, TCE eventually revolutionized antitrust law and policy, by altering how economists viewed both complete vertical integration and partial contractual integration via non-standard contracts such as exclusive dealing, minimum resale price maintenance, exclusive territories,  location clauses and tying agreements.  When Coase published "The Nature of the Firm," economists identified two, and only two, possible reasons for complete vertical integration.  First, such integration could create technological efficiencies and thus reduce production costs.  Second, integration could foreclose rivals from important  sources of inputs, thereby creating or fortifying the integrating party's market power.  Thus, when economists, or, for that matter, antitrust courts or enforcement agencies, could not identify any efficiency purposes for such integration, they naturally inferred that the conduct was anticompetitive.  The result was the so-called "inhospitality tradition" of antitrust law.

Coase's work and the resulting transaction cost revolution completely undermined these accounts of complete and partial integration.  According to Coase, reliance upon an unfettered market to conduct economic activity entailed various costs, what he dubbed "transaction costs."  By integrating vertically, then, a firm could avoid such transaction costs.  As Coase noted at the time, this explanation had nothing to do with market power or monopoly considerations.  Nor did this explanation depend upon any reduction in technological production costs.

Unfortunately Coase's work lay dormant for three decades, during which time antitrust courts and the enforcement agencies became increasingly hostile to complete and partial vertical integration.  During the mid-1960s, economists and others began to rediscover Coase's 1937 work, perhaps inspired to do so by Coase's "Problem of Social Cost," published in 1960.  Most famously, Oliver Williamson began to rearticulate and expand upon Coase's transaction cost thesis.  In particular, Williamson identified specific investments and the resulting threat of opportunism as an important source of transaction costs.  Moreover, during the same decade, Robert Bork cited Coase's Nature of the Firm in his 1966 work on the Sherman Act's treatment of non-standard contracts.  In particular, Bork explained why various forms of partial integration could align the interests and incentives of the contracting parties, thereby accomplishing the same economic objectives through partial integration that economic actors might otherwise achieve via complete vertical integration.  Most famously, building on the work of Lester Telser (who had not cited Coase), Bork argued that minimum resale price maintenance and non-price restraints such as exclusive territories and location clauses could ensure that independent dealers made optimal investments in promotional effort, thereby facilitating a manufacturer's strategy of relying upon a system of independent dealers to distribute the manufacturer's product.  As previously explained on this blog, this work, along with additional work by Bork and others, convinced the Supreme Court to repudiate numerous decisions from the inhospitality era.

Robert Bork, Antitrust Revolutionary

Economic Subversive

This week brought the sad news that Robert Bork has died, at the age of 85.  Bork had a long and varied career.  (See here and here for remembrances.)  He served in the Marine Corp from 1945-46 and graduated from the College at the University of Chicago in 1948.  He then matriculated at the University of Chicago Law School, which he left to rejoin the Marines during the Korean War.  After Law School he served as a fellow in Law and Economics for one year, practiced law at Kirkland and Ellis in Chicago and then joined the faculty at Yale Law School.  While at Yale, President Nixon nominated and appointed Bork to serve as Solicitor General of the United States in 1973, where Bork served until the end of the Ford Administration in January 1977.  President Reagan nominated Bork to the United States Court of Appeals for the District of Columbia Circuit in 1981 and appointed him after Senate confirmation in 1982.   He retired from that court in 1988.  President Reagan nominated Bork to the Supreme Court in 1987, but the U.S. Senate ignominiously refused to confirm him.  This essay, by former Tenth Circuit Judge Michael McConnell, now Director of the Stanford Constitutional Law Center, explains why the Senate's rejection of Judge Bork helped politicize the Court and diminish the Rule of Law.

Most of the punditry and analysis following Judge Bork's death has focused on his views on the Constitution, particularly his strong and articulate support for an "originalist" approach to constitutional interpretation.  These commentaries have ignored Bork's tremendous influence in another field, namely, Antitrust Law.  For instance, the main piece in the New York Times on Bork's passing, while over 2,000 words long, contains only a brief paragraph about his contributions to antitrust law.  CNN's story on the occasion of Bork's death does not mention Bork's contributions to antitrust law at all, aside from a brief quote of Justice Scalia, who lauds Bork's influence over the field.  Other essays have, like Judge McConnell's, focused on the implications of Bork's nomination and rejection for the confirmation process and the integrity of the courts.  (See here and here.)  These oversights are unfortunate.   Simply put, Bork helped revolutionize the way that scholars, judges and enforcement officials view the appropriate scope of antitrust regulation and thus the role of the federal government in the nation's economy.  More precisely, no individual scholar had a greater influence on antitrust law and policy than Robert Bork.

Many know Bork from his classic book, The Antitrust Paradox, published in 1978.  For instance, one remembrance states "The Antitrust Paradox, published in 1978, shifted the entire focus of antitrust policy toward consumer welfare," without mentioning any previous work.  (See also several similar statements by various participants in this National Review symposium.)   However, Bork's campaign to revolutionize Antitrust started more than a decade and a half before publication of the Antitrust Paradox.   In particular, while at Yale (ironically?) Bork laid the foundation for the so-called "Chicago Revolution" in antitrust law and policy with a series of articles published between 1961 and 1968.  The Antitrust Paradox drew upon these arguments.     In these works, Bork made two broad and fundamental contributions to antitrust analysis, one normative and one technocratic.

As a normative matter, Bork argued that the antitrust laws should have one goal and one goal alone, namely, the maximization of consumer welfare, which Bork equated with allocative efficiency and thus total economic welfare.  To be sure, other scholars embraced a "total welfare" approach before Bork did.  In particular, and as I explained in this article, Harvard-school economists Edward Mason, Donald Turner, and Carl Kaysen also embraced "total welfare" as an exclusive goal of antitrust regulation.  However, Bork's work differed from the work of these scholars in two ways.  First, Bork expressly linked "total welfare" and "efficiency" to "consumer welfare," whereas the Harvard School had not employed the latter term, choosing instead to focus only on "efficiency" as the appropriate goal.  Second, unlike these Harvard scholars, Bork offered a legal defense of total welfare/consumer welfare as an antitrust goal.  In particular, after a thorough review of the legislative history of the Sherman Act, Bork argued that the Congress that passed the Act only "intended" to ban those restraints that reduced total welfare, thus leaving those that enhanced efficient resource allocation unscathed.  See Robert H. Bork, Legislative Intent and the Policy of the Sherman Act, 9 J. L. & Econ. 7 (1966).  Bork also argued that, even if Congress's goal was unclear, courts should nonetheless pursue "consumer welfare" exclusively, because the pursuit of any other goal (e.g., a fair distribution of income) or combinations of goals (e.g. protection of small businesses and efficiency) would require courts to make value choices and trade-offs that were properly left to the legislature.  See  Robert Bork, The Goals of Antitrust Policy, 57 American Econ. Rev. (Papers and Proceedings) 242 (1967).  Some scholars have taken issue with Bork's equation of "consumer welfare" with total welfare, with one scholar referring to this claim as "something [Bork] made up." (See also here for an argument that Congress meant to ban all restraints that increased consumer prices in a relevant market, even if the practice increased total welfare.)    Correct or not, Bork's claim was highly influential.  Indeed, in Reiter v. Sonotone, 442 U.S. 330, 343 (1979) the Supreme Court announced that Congress intended the Sherman Act as a "consumer welfare prescription," citing the Antitrust Paradox for this proposition.

As a technocratic matter, Bork proposed the sort of radical reform in antitrust doctrine necessary to make "consumer welfare" as he defined it the exclusive priority of antitrust law.   Perhaps most famously, Bork rehabilitated the distinction, made famous by William Howard Taft, between "naked" and "ancillary" restraints.  See Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898).  Like Taft, Bork argued that naked restraints should be unlawful per se, while ancillary restraints should be analyzed under a forgiving rule of reason.   Moreover, Bork also contended that early Sherman Act case law followed Taft's template, even though courts sometimes used different formulations when articulating antitrust doctrine.  In particular, Bork concluded that Taft's formulation anticipated the "Rule of Reason," articulated in Standard Oil v. United States, 221 U.S. 1 (1911) (discussed here), which banned only those restraints that "unduly restrain trade" by producing "monopoly or its consequences."  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 74 Yale L. J. 775 (1965).  Moreover, employing the latest economic theory of the time (and theory that is still adequate for such purposes today), Bork explained why this distinction between "naked" and "ancillary" restraints would produce results that would maximize "consumer welfare" as he defined it.  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, part II, 75 Yale L. J. 373 (1966).   Thus, Bork explained that ancillary restraints could align the incentives of individual venture participants with the welfare of the overall venture and thus produce significant efficiencies and enhance the allocation of resources.  In so doing, he argued persuasively for the expansion for the category of restraints deemed "ancillary" to otherwise lawful objectives.  For instance, relying upon the work of Lester Telser, Bork explained how minimum resale price maintenance or exclusive territories imposed by manufacturers or joint ventures could ensure that dealers or venture partners made adequate investments in promotion, instead of "free riding" on the efforts of other dealers or partners. (Unlike Telser, who had focused only on vertical minimum rpm, Bork focused on horizontal and vertical price and non-price restraints.)   In so doing, Bork drew on the work of Ronald Coase, whose 1937 article on the Nature of the Firm would help Coase earn the Nobel Prize in Economic Science in 1991.  Thus, Bork was an early pioneer in applying transaction cost economics to antitrust problems.   (See here, at pp. 53-54 for an account of Bork's early invocation of Coase and transaction cost considerations).  During this same period, Richard Posner, a later convert to Chicago thinking, contended that non-price vertical restraints rarely produced benefits and should this be presumptively unlawful.

The Supreme Court endorsed Bork's reasoning in Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977), holding, contrary to previous precedent, that non-price vertical restraints could prevent "free riding" and thus may produce "redeeming virtues" of the sort that preclude per se condemnation.  Instead, the Sylvania Court said, courts should analyze such agreements under a forgiving rule of reason.  (Note that the Court issued Sylvania before publication of the Antitrust Paradox.)  Less than a decade later, the Court applied similar reasoning in the context of horizontal restraints, invoking Sylvania and subsequent work of Judge Bork for the proposition that horizontal agreements between members of  sports leagues could enhance the quality of the league's product, thereby preventing per se condemnation of such restraints.    See NCAA v. Board of Regents of the University of Oklahoma, 464 U.S. 85 (1984).  Shortly thereafter, the Court extended Sylvania, holding that an agreement between a manufacturer and a dealer to terminate another dealer for price cutting was not unlawful per se.  See Business Electronics v. Sharp Electronics, 485 U.S. 717 (1988).  Nearly a decade later, the Court unanimously reversed the per se ban on maximum resale price maintenance.  See State Oil v. Khan, 522 U.S. 3 (1997).  More recently, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the Court overturned a 96 year old ban on minimum resale price maintenance, relying upon the work of Bork and others for the proposition that such agreements could combat free riding and thus facilitate promotion of a manufacturer's product.  Each of these decisions, from Sylvania through Leegin, cited Bork's academic work with approval.  To be sure, these decisions cited the work of other scholars as well, but at least some such work simply repeated what Bork had already said a decade or more earlier.

Bork's influence was not confined to the definition and treatment of ancillary restraints.  He also leveled powerful critiques at the Supreme Court's hapless and wealth-destroying merger doctrine, exemplified by cases such as Vons Grocery v. United States, 384 U.S. 270 (1964) and Brown Shoe Co. v. United States, 370 U.S. 294 (1962).  See Robert H. Bork, Anticompetitive Enforcement Doctrines Under Section 7 of the Clayton Act, 39 Tex. L. Rev. 832 (1961).    In both decisions the Supreme Court banned, as contrary to section 7 of the Clayton Act, mergers between firms with small shares in markets characterized by ease of entry.  (In Vons, for instance, the firm created by the challenged merger would have had 8 percent of a market with over 3,000 remaining firms.)  As Bork explained, such mergers could not create or facilitate the exercise of market power.  It was thus logical to infer that parties to such transactions hoped to achieve efficiencies. Bork also leveled powerful critiques against overly intrusive standards governing alleged predatory activity, particularly often-unfounded claims that refusals to deal or vertical integration disadvantaged rivals without creating offsetting efficiencies and thus injured consumers.  See Robert Bork and Ward Bowman, The Crisis in Antitrust, 65 Columbia L. Rev. 363 (1965); Robert H. Bork, Vertical Integration and the Sherman Act, 22 U. Chi. L. Rev. 157 (1954).  In 1986, the Supreme Court, in a unanimous opinion by Justice Stevens, invoked Bork's test for evaluating alleged predatory conduct.  See Aspen Highlands v. Aspen Highlands Ski Co., 472 U.S. 585, 597 n. 33 (1986)(citing the Antitrust Paradox for the proposition that conduct was only predatory if it excluded rivals on some basis other than efficiency).

Obviously Bork was not the only participant in the Chicago Antitrust Revolution.   Moreover, many outside the Chicago School endorsed Chicago School critiques of current doctrine and proposals for reform.  For instance, Bork's work led Harvard School icon Donald Turner to reverse his views on vertical restraints.  However, the record shows that Bork led the way and employed reason, not force, to convince others to follow.

The AALS Cartel

 Not Good Enough for the AALS?

Received Substandard Legal Education?

Over at Truth on the Market, Thom Lambert has taken issue with a rule, promulgated by the American Association of Law Schools, that forbids law schools from making lateral offers of employment to faculty at other schools after March 1.  To be more precise, the rule admonishes against such offers in cases in which the poached faculty member must begin teaching at the new institution that same fall.  Lambert asserts, and I know of no evidence to the contrary, that law schools fastidiously adhere to the rule, even though it is framed as a "best practice."

As Lambert points out, the rule in question is a horizontal restraint of trade between rivals of the sort that courts ordinarily condemn.  Indeed, he expressly (and properly) invokes the Department of Justice's recent suit against eBay, challenging an alleged agreement between eBay and Intuit whereby the two firms agreed not to poach each other's employees.  (The Department also entered a consent decree with Intuit forbidding the practice.)  If the eBay/Intuit agreement violates Section 1 of the Sherman Act, and Lambert makes a persuasive case that it does, then so does the agreement between the member law schools of the AALS.  Such agreements, by their nature, reduce rivalry between companies (in the case of eBay/Intuit) and member schools (in the class of the AALS rule).  At the same time, neither agreement appears to produce any "redeeming virtue" of the sort recognized as cognizable by case law applying the Sherman Act.  To be sure, the fact that a faculty member leaves her institution in, say, May, for another school, can impose substantial costs on the institution that loses the faculty member.   However, as Lambert notes, the costs will vary depending upon the faculty member, the courses she taught, and whether the school is located near other schools that might be sources of potential visitors who would not have to relocate.  As Lambert also points out, schools can protect themselves unilaterally against such harm by entering contracts forbidding their faculty from accepting offers after a certain date, contracts that contain liquidated damages clauses that compensate the school for the any damages suffered when the faculty member leaves late in the year.    (These damages could, for instance, compensate the school for the cost of hiring a visitor to cover the departing faculty member's courses on short notice.)  (By analogy, it should be noted that many universities unilaterally provide that a faculty member who receives a sabbatical must return to teach for at least one year before leaving for another school.)  As a result, Lambert contends, no agreement between law schools is necessary to combat the harms from late departures.

Of course, and as Lambert recognizes, the Sherman Act does not ban all horizontal restraints.  Instead, as previously noted on this blog, courts will allow those horizontal agreements that are necessary to overcome any market failures that would result from parties' reliance upon an unfettered, atomistic market to conduct economic activity.  A classic example is the formation of a partnership and restraints ancillary thereto.  Such restraints may, for instance, prevent individual partners from "moonlighting," that is, competing with the partnership, thereby eliminating horizontal rivalry that would otherwise occur.  Nonetheless, as William Howard Taft explained over a century ago, the common law encouraged such restraints, and properly so.   After all, Taft said, such agreements encourage partners to devote all of their efforts to furthering the business of the partnership, instead of diverting value from the enterprise to themselves or, as modern economists would put it, "free riding" on the larger partership.  See United States v. Addyston Pipe & Steel Co., 85 F. 271, 280 (6th Cir. 1898) (treating such restrictions as paradigmatic ancillary restraints that the law should "encourage"); Robert Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L.J. 373, 381-83 (1965) (explaining how such restrictions could prevent free riding by partners on the overall enterprise and thus enhance welfare).  Put another way, such agreements pass muster under the Sherman Act's "Rule of Reason," articulated in Standard Oil v. United States, because they do not restrain trade "unduly," but instead "advance" or "fructify" it. 

In short, horizontal cooperation between rivals is perfectly proper when reliance on the unfettered market would otherwise  result in a market failure and a misallocation of resources.  See Alan J. Meese, Price Theory, Competition and the Rule of Reason, 2003 Ill. L. Rev. 77.  Where, on the other hand, there is no such failure, that is, where unilateral decisions in an efficient market will produce efficient results, there is no rationale for such collective action, and courts should ban otherwise lawful restraints.   See Alan J. Meese, Monopoly Bundling in Cyberspace: How Many Products Does Microsoft Sell?, 44 Antitrust Bulletin 65 (1999).  As the Supreme Court explained in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), the antitrust laws rest on the assumption that consumers understand their own interests and can assess the virtues and relative prices of competing products.

At the same time, the "anti-poaching agreement" that Lambert has condemned may be the tip of the AALS cartel iceberg.   Even a brief perusal of the organization's membership requirements reveals various provisions that eliminate competition without any apparent market failure justification.  For instance, the AALS provides that law schools must have a full time faculty of a certain minimum size, so as to "provide ready professional relationships among the faculty and between the faculty and the students and to offer a reasonably broad curriculum."  The Nation's first law school, at William and Mary, would have flunked this standard, because the faculty consisted of Founding Father George Wythe, who taught, among others, John Marshall, who would later become Chief Justice of the United States.  So far as I know, however, no one would plausibly argue that Marshall's legal education was "not up to snuff."

The same AALS standards also prevent a law school from de-emphasizing research so as to encourage more teaching,   The standards also mandate that each member school "shall seek to have a faculty, staff, and student body which are diverse with respect to race, color, and sex."  Finally, the standards require each school to have a library of a particular size.  The requirements of minimum faculty size, significant support for research and minimum library size, it should be noted, likely raise barriers to entry, by requiring a new school to enter at a particular scale to become a member.

Each of these standards seems inconsistent with the principle that Lambert espouses and, for that matter, the Supreme Court's antitrust case law.  One can stipulate that large faculties, significant research, diversity and large libraries are "good things" without thereby providing a justification of collective imposition of these objectives.  Put another way, there is no apparent market failure that prevents competition between member schools from resulting in appropriate attention to each of these attributes.  For instance, there is no apparent reason that potential law students are incapable of assessing the value that a diverse faculty will add to their education and thus preferring, other things being equal, those schools with diverse faculties.  That's the way competition in a free society is supposed to work.  Ditto for faculty size.  If a school believes that its large faculty provides a better educational environment, other things being equal, than a smaller faculty and vice versa, each such school should be free to offer its product in the marketplace, subject to market competition from other products.  Who knows, one such school might educate the next John Marshall!
 

Is The NCAA an Illegal Cartel?

Greedy Cartelist?

June 6, 2021 Update:

Earlier today I posted on this blog a forthcoming paper entitled: Requiem for a Lightweight: How NCAA Continues to Distort Antitrust Doctrine, 56 Wake Forest L. Rev. _____ (2021) (forthcoming).  (See here).  The paper critiques several aspects of the Supreme Court's decision in NCAA v. Board of Regents of the University of Oklahoma, 468 U.S 84 (1984), including the Court's decision to exempt all restraints imposed by sports leagues from per se condemnation as well as dicta suggesting that courts should subject some restraints that avoid per se condemnation to a "Quick Look" version of Rule of Reason.  The paper also endorses NCAA's dicta to the effect that horizontal restrictions on rivalry for the services of student-athletes can produce redeeming virtues, with the result that such restraints should survive per se condemnation.  The paper calls on the Supreme Court to correct these and other errors in NCAA v. Alston and thus ensure a more coherent jurisprudence under Section 1 of the Sherman Act that better reflects the teachings of modern economic theory.

An Op-Ed in Sunday's New York Times entitled "The College Sports Cartel," Joe Nocera decries the fact that NCAA student athletes cannot receive more than a full scholarship, room and board, and stipend to cover living expenses.   As the author notes, NCAA rules --- the product of an agreement between competing member schools --- forbid schools to pay student-athletes a salary analogous to what, say, a minor league baseball team would pay its players.  (Put another way, NCAA rules require student-athletes to remain amateurs.)  The author characterizes this agreement as "collusion" of the sort ordinarily forbidden by the antitrust laws, collusion that enriches member schools at the expense of purportedly "shackled" student athletes.   He ends by opining that "[I]t certainly would be worthwhile to see someone challenge [the NCAA's] cartel behavior in court."

And yet, as Nocera himself perceptively admits: "Sports leagues can’t exist without at least some [so-called] collusion."   A classic example, of course, the agreement between a league's members on the number of games in a season.  Thus, the NBA's decision that each team will play "only" 82 games in the regular season is a horizontal agreement on the output of games, a limitation that could be unlawful in other circumstances.  Ditto for members' agreement on the length of the playoffs, including how many games are in the finals.  (Imagine if Ford, GM and Chrysler announced they were agreeing on the number of pickup trucks they would produce in the coming year.)  Indeed, calling such agreements between members of the NBA "collusion" would deprive the word of any useful descriptive value in this context, as the term would become a synonym of "contract" or "cooperation."

Sports leagues are not unique in this sense.  All sorts of welfare-increasing economic activity is the result of agreements between rivals, agreements that economists and antitrust courts call "horizontal."  For instance, the formation of a partnership is a horizontal agreement that eliminates rivalry between the new partners.  Such partnerships often include explicit agreements between the partners not to "moonlight" and thus compete with the partnership.    Ditto for franchising, which many economists properly conceptualize as an agreement between actual or potential rivals (think of the numerous independent McDonalds franchisees in a medium-sized town).  Such agreements set product standards, decide what products members of the chain will offer, what ingredients each product will contain, etc.  Without such (horizontal) agreements, what consumers currently experience as a well-run franchise system would rapidly devolve into a loose confederation of business establishments that, while operating under the same trademark, would offer varying products and varying degrees of quality, sowing confusion in the mind of consumers and defeating the purpose of operating under a single trademark.  Thus, while such agreements reduce rivalry in some sense between members of a franchise system, they can ultimately enhance the quality of the products offered by a particular franchise system and thus further useful competition with other such systems, to the ultimate benefit of consumers and the rest of society. 

In short, like many productive ventures, the NCAA and other sports leagues entail cooperation between rivals, cooperation that could be problematic in other contexts when viewed in isolation.  The key question from the perspective of the antitrust laws is whether the cooperation in question, while nominally reducing competition between rivals, might in fact overcome a market failure and thus increase the welfare of society by inducing a more efficient allocation of resources.  That, in short, is the focus of antitrust's "Rule of Reason, " announced in Standard Oil v. United States.  (See this article for a more in depth explanation of the connection between market failure and Rule of Reason analysis.)

While litigation against the NCAA on this question might enrich antitrust lawyers, the Supreme Court has already explained how it would rule in such a case.  Twenty-five years ago, in NCAA v. Bd. of Regents of the University of Oklahoma, the Court evaluated NCAA rules limiting the number of games that networks could broadcast on television during any given season.  The rules also limited the number of times that any particular school could appear on television.  The Court condemned the rules under the Rule of Reason because they reduced output without any offsetting benefits.

In so doing, however, the Court expressly approved other horizontal restraints imposed by the NCAA, including those fostering amateurism by the players.  The Court's language (previously discussed on this blog) is worth quoting in full:

"What the NCAA and its member institutions market in this case is competition itself -- contests between competing institutions. . . . . [T]he NCAA seeks to market a particular brand of football -- college football. The identification of this 'product' with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable, such as, for example, minor league baseball. In order to preserve the character and quality of the "product," athletes must not be paid, must be required to attend class, and the like. And the integrity of the 'product' cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice -- not only the choices available to sports fans but also those available to athletes -- and hence can be viewed as procompetitive."

The Court then noted (as suggested above) that "a restraint in a limited aspect of a market may actually enhance market-wide competition."

Simply put, the Court concluded that unbridled competition between member schools for players, thereby allowing schools to pay players a salary, would result in a market failure.  That is to say, no individual school would, when setting players' compensation, take into account the impact of that decision on the overall "brand" or "image" of the product being offered.  While players might benefit in the short run, the "brand appeal" of college football would suffer over the longer run, as what was once amateur athletics associated with an academic tradition (and thus a natural fan base) would degenerate into a professional league inferior to the NFL and without a natural fan base.

The result may seem to countenance an unfair distribution of the benefits produced by NCAA football.  Certainly some schools earn millions each year due to the performance of their student athletes.  (At the same time, however, many others lose money on the sport, and no one is proposing that student athletes share in these loses.)  However, antitrust law does not exist to ensure a fair division of the gains from economic activity but instead only bans those agreements or unilateral practices that reduce economic welfare.