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Impact of Antitrust Laws on American Professional Team Sports


Glaucio Scremin
United States Sports Academy

Introduction

Since the advance of the first piece of antitrust legislation in the 1890s, antitrust law has considerably impacted the business of professional sports. Particularly, in the past forty years individual players and player unions as well as competing leagues and team owners have disputed restrictive professional league policies on free agency, salary spending, franchise ownership and monopoly power. These challenges were made with the use of antitrust law theory.

Although antitrust issues related to professional sports cannot be considered separately from the overall body of antitrust law, many have argued that several antitrust issues arise more frequently in professional sports cases. Additionally, the unique restrictive rules and policies applied by the sport industry are more likely to face antitrust challenges. Major antitrust litigation decisions involving professional sports have not only affected the sport industry but they have also played a role in overall antitrust jurisprudence (Cozzillio & Levinstein, 1997). One of the milestone decisions was the immunity from antitrust challenges granted to professional baseball by the United States Supreme Court in 1922 (Federal Baseball Club of Baltimore, Inc v. National League of Professional Baseball Clubs, 1922). Other professional sports have been to some extent able to capitalize on baseball’s antitrust exemption. However, the extension of baseball’s exemption to other sports has scarcely been full proof. Quite the contrary, in many instances plaintiffs have had success in establishing anti-competitive consequences and unreasonable restraint of trade against professional sport teams and leagues (Cozzillio & Levinstein, 1997).

As a result of antitrust litigation, professional sport leagues and teams had to abandon or at least modify rules and policies governing their businesses. This is a trend with no signs of slowing down. As professional leagues and teams continually adopt restrictive measures unparalleled in other industries they become more prone against antitrust challenges.

Because of unmatched restrictive practices and policies, the sport industry is particularly vulnerable against antitrust challenges. For any student or practioner in the field of sport a basic understanding of antitrust law, as it relates to sports, is warranted given the likelihood of antitrust litigation against sport organizations. In addition, discernment of antitrust law can give those involved in the sport industry a better understanding of the rules, regulations, policies and structures of organizations in professional sports. What follows is a brief review of the most celebrated cases involving professional team sports and antitrust law and an analysis of the impact of such cases on the structure of professional team sports in the United States.

 

Impact of Antitrust Law on Professional Baseball

Baseball was the first professional sport to gain exemption from antitrust federal laws. In the landmark case: Federal baseball club of Baltimore, Inc. v. National League of Professional Baseball Clubs (1922), the Federal Baseball Club of Baltimore, a member of the former Federal League of Professional Baseball Players, brought suit against the National League of Professional Clubs for antitrust violations. The plaintiffs contended that the National League’s reserve system of players did not allow for the development of other competing leagues. In addition, the acquisition of baseball clubs from other leagues gave the National League monopoly over the relevant market of baseball teams. Accordingly, the plaintiffs challenged these two restrictive policies as being severe restrictions to the development of competition among professional baseball leagues, which directly violated antitrust laws (Picher, 1997).

The United States Supreme Court, however, found unanimously that the business of baseball was a purely a state affair and that therefore could not be in violation of antitrust statutes. The reasoning of the Supreme Court justices was that the mere fact that baseball fans crossed state lines to attend games was not directly related to production, did not constitute commerce, and therefore did not change the character of the business (Picher, 1997).

A few decades later, in 1953, the Supreme Court reaffirmed baseball’s antitrust exemption by ruling in favor of the New York Yankees in a case involving a player (George Toolson) who brought suit against the New York Yankees challenging baseball's player reserve system as a violation of federal antitrust laws. Toolson was under contract with the Yankees' farm club in Newark when he was assigned, against his wishes, to Binghamton. Toolson refused to report to his new club and was, in accordance with league rules, placed on the ineligible list, blacklisting him from any other baseball team (Toolson v. New York Yankees, 1953; Picher, 1997).

However, the Court did not rely on the interstate commerce reasoning in its decision. Instead, the Supreme Court this time based its ruling on other factors: “(1) congressional awareness of the Federal Baseball Club decision coupled with legislative inaction; (2) the baseball industry's development during the previous thirty years, on the understanding that it was not subject to existing antitrust legislation; (3) a reluctance to abrogate Federal Baseball Club with the consequential retrospective effect; and (4) a declared desire that, if there are evils in this field, any remedy should be adopted by legislative fiat” (Toolson v. New York Yankees, 1953; Picher, 1997).

In Flood v. Kuhn (1972) once again a player sued the league for antitrust law violations for its restrictive policies regarding the player reserve system. Curt Flood wanted to be made a free agent to be able to negotiate his own professional destiny after the end of his contract with the Philadelphia Phillies. However, his wish was not granted by the league and Flood sought legal remedy. The Supreme Court upheld baseball’s antitrust exemption by finding for the defendants in the case. In this instance, however, the Supreme Court acknowledged that baseball was indeed involved in interstate commerce. Nevertheless, baseball’s antitrust exemption was a decision that deserved the benefit of stare decisis and that any changes in the law pertaining to antitrust statutes and baseball would have to be made through legislative action (Flood v. Kuhn, 1972; McMahon & Rossi, 1995; Picher, 1997).

Following the Court’s recommendations that professional baseball’s antitrust exemption be remedied by congressional action, the House of Representatives and the Senate lobbied successfully to pass what came to be called the Curt Flood Act. This act was enacted in 1998 and although it does not completely eliminate baseball’s exemption it does limit it significantly. The Curt Flood Act is restricted to the players and gives them the right to sue their employers for antitrust violations. Baseball’s antitrust exemption still applies to all non-player areas, however (McMahon & Rossi, 1995).

 

Impact of Antitrust Law on Professional Basketball

Since its conception the National Basketball Association (NBA) has been confronted with numerous antitrust disputes. Antitrust litigation challenges in professional basketball have arisen from individual players, player associations, owners and prospective team owners, competitor leagues and private organizations.

One of the earliest cases involving antitrust challenges from players and professional basketball was the Molinas v. NBA (1961) lawsuit. Jack Molinas was a NBA player who had been suspended for placing a bet on a game he participated. Molinas brought suit against the NBA alleging violation of antitrust law due to restriction of trade because he had no economic alternative to playing basketball in the NBA. The court upheld Molinas suspension asserting that the restraint was a reasonable one as the NBA had a legitimate interest in banning gambling out of the NBA (Molinas v. National Basketball Association, 1961; Cotten & Wolohan, 2003).

More recently the NBA has faced antitrust challenges from players due to its salary cap and other forms of collective bargaining agreements. In 1984 a rookie NBA player, Woods challenged the NBA salary cap (Wood v. National Basketball Association, 1984). The case was dismissed on the grounds of the non-statutory labor exemption but when the collective bargaining agreement expired in 1987 a joint player action was filed which culminated in a settlement and a new and improved collective bargaining agreement (Bridgeman v. National Basketball Association, 1987). When the 1987collective bargaining agreement expired in 1994 the new negotiations stalled for about 2 years and culminated in a general player strike. The NBA brought suit against the NBA Players Association (NBPA) seeking to decertify them as the collective bargaining representative (National Basketball Association v. Williams, 1995). The two parties, after turbulent negotiations, settled a new collective bargaining agreement in 1996.

In an antitrust challenge by a prospective team owner, Irving H. Levin sued the NBA for antitrust violations after the NBA board of governors rejected the transfer of the membership of the Boston Celtics to a partnership which the plaintiffs proposed to form. The court ruled in favor of the NBA stating that “plaintiffs wanted to join with those unwilling to accept them, not to compete with them, but to be partners in the operation of a sports league for plaintiffs' profit. Further, no matter which reason one credits for the rejection, it was not an anti-competitive reason.” (Levin v. National Basketball Association, 1974).

In a lawsuit involving current team owners, the Chicago Bulls brought suit against the NBA for violation of section 1 of the Sherman Act due to the NBA restrictions on the sale of television broadcast rights. After fighting in the federal courts for about 6 years the two parties settled out of court for an undisclosed settlement agreement ("Chicago Professional Sports Limited Partnership v. National Basketball League", 1996).

The NBA has also fell victim of antitrust disputes involving private corporations. In Independent Entertainment Group v. NBA (1994) the plaintiffs alleged that two NBA players, Michael Jordan and Earvin "Magic" Johnson, agreed to participate in a television broadcast, on a pay-per-view basis, of a one-on-one basketball entertainment event, to be known as "King of the Court." Independent Entertainment Group argued that the NBA's refusal to allow NBA players to participate in King of the Court violated Sections 1 and 2 of the Sherman Act. Specifically, plaintiffs contended that the NBA and its member teams had unreasonably restrained trade and monopolized the market for major basketball events. The court ruled in favor of the NBA arguing that “employment arrangements with NBA players that cannot be unreasonable or predatory under the Sherman Act as a matter of law” (Independent Entertainment Group, Inc. v. National Basketball Association, 1994).

 

 

Impact of Antitrust Law on Professional Football

Much like the NBA, the National Football League (NFL) has been sued numerous times for antitrust violations by a number of different fronts. Also like the NBA, the greatest volume of antitrust disputes has arisen from lawsuits brought by individual and association of players. In one of its earliest challenges, the NFL was sued in 1950 after a former NFL player, William Radovich, who was trying to return to the league, was denied entrance on the basis of disloyalty. Radovich spent two years playing in a rival football league American Football League (AFL) and when he attempted to return to the NFL he was suspended for 5 years. He alleged that his suspension was in violation of antitrust laws. The court dismissed Radovich’s claims on the grounds of baseball’s exemption from antitrust violations (Radovich v. National Football League, 1956).

In a landmark case involving NFL players and the league, Antony Brown and eight other developmental squad players brought a class action suit against the NFL. The plaintiffs alleged that the NFL engaged in price-fixing in violation of the Sherman and Clayton Acts. The District Court awarded the players trebled damages but the lower Court’s decision was later reversed by the Appellate and Supreme Courts. The Supreme Court concluded the following: “an alleged restraint on competition imposed through the collective bargaining process affects only the bargaining parties, and has no impact on the product market, the non-statutory labor exemption shields those parties from antitrust liability” ("Brown v. Pro Football, Inc." 1996).

In a lawsuit involving a competitor league the AFL sued the NFL for violation of section 2 of the Sherman Act. The AFL alleged that the NFL had established a market monopoly. The Court ruled in favor of the NFL on the basis of insufficient evidence of the NFL’s intent to monopolize (American Football League v. National Football League, 1963). In 1984 the United States Football League (USFL) brought suit against the NFL for antitrust violations. The USFL alleged that the NFL pressured major television networks not to firm an agreement with them. The jury ruled in favor of the USFL holding that the NFL had unlawfully monopolized major league professional football. The jury rejected all other USFL claims and awarded the plaintiffs 3 dollars in trebled damages (Cozzillio & Levinstein, 1997).

Because the NFL has a 75-mile radius home territory restriction on franchise teams as well as a requirement for unanimous voting by team owners on franchise relocation, the league has suffered continuous antitrust litigation by NFL team owners attempting to relocate their teams. For instance, in 1978 the Los Angeles Rams decided to relocate from the Coliseum to a new stadium, the "Big A," in Anaheim, California. The NFL and its members did not approve the relocation and the Los Angeles Memorial Coliseum Commission filed suit against the NFL for unlawful restraint of trade in violation of section 1 of the Sherman Act. After a first mistrial the jury in the second trial ruled in favor of the Coliseum and awarded the plaintiffs $50 million dollars in damages ("Los Angeles Memorial Coliseum Commission v. National Football League, 1984). Furthermore, Oram (2000) suggested that the subsequent relocation of the Baltimore Colts to Indianapolis in 1985 and the Jets relocation from New York to New Jersey in 1986 without NFL opposition would not have been possible if not for the favorable Los Angeles Coliseum ruling (Oram, 2000). For the past few years the NFL has repeatedly and unsuccessfully tried to gain exemption from antitrust violations on relocation restrictions by asking Congress for exemption (Cozzillio & Levinstein, 1997).

 

 

Impact of Antitrust Law on Professional Hockey

In the 1970s, two competing professional hockey leagues existed in North America: the World Hockey Association (WHA) and the National Hockey League (NHL). In 1972 the WHA brought suit against the NHL alleging monopoly control over the player market. The end result after fifteen separate lawsuits, filed by different WHA teams and several rulings, was that all parties except one WHA reached an antitrust settlement agreement (Cozzillio & Levinstein, 1997). The claims made by the WHA team which did not decide to settle were later dismissed by the Supreme Court (Philadelphia World Hockey Club, Inc. V. Philadelphia Hockey Club, Inc., 1972).

Like other professional sport leagues, both the NHL and the WHA have been faced with a plethora of antitrust challenges by players. In an representative case: McCourt v. California Sports, Inc. (1979), McCourt brought suit against the NHL the Los Angeles Kings and the Detroit Red Wings for unwillingly trading him to a different NHL team. The plaintiff alleged that the “NHL player reserve system, and consequently the assignment of his contract to the Los Angeles Kings as the compensation for free agent violated Section 1 of the Sherman Act”. McCourt sought injunctive relief under Sections 4 and 10 of the Clayton Act to prevent the defendants from enforcing the arbitration award and to require that his contract be reassigned to the Detroit Red Wings. The appeals Court ruled in favor of the NHL stating that “the reserve system was incorporated in the agreement as a result of good faith, arm's-length bargaining between the parties. As such it is entitled to the [labor] exemption” (McCourt v. California Sports, Inc., 1979).

 

 

Impact of Antitrust Law on Professional Soccer

The two most prominent cases involving antitrust litigation and professional soccer are the North American Soccer League (NASL) v. National Football League (1982), and Fraser v. Major League Soccer (2000). In NASL v. NFL, the NASL brought suit against the NFL alleging that the NFL’s ban on ownership by its members of teams in competing leagues violated section 1 of the Sherman anti-trust act. The court ruled against the NASL stating “that the cross-ownership ban by the NFL was not aimed only at protecting the NFL as a league from competition with the NASL as a league. Its goal was also to shield certain NFL member teams from competition in their respective home territories on the part of NASL teams that were gaining economic strength and threatening the revenues of NFL teams. NFL’s cross-ownership ban would exclude NASL’s teams from continued enjoyment of and access to a significant segment of the market supply of sports capital and skill, thereby restraining at least some NASL teams from competing effectively against NFL teams for fan support and TV revenues” (North American Soccer League v. National Football League, 1982).

In Fraser v. Major League Soccer (MLS), Fraser and seven other professional soccer players brought suit against the MLS alleging a number of antitrust claims under the Sherman and Clayton Acts as a result of restraint player mobility between MLS clubs. The court ruled for MLS declaring that (1) section 1 of the Sherman Anti-Trust Act only prohibits collective activity by plural economic factors which unreasonably retrain competition, (2) MLS player hiring policy is a unilateral activity of a single firm and section 2 of the Sherman Anti-Trust Act does not apply to unilateral activity, and (3) the formation of the MLS does not violate section 7 of the Clayton Act because it does not involve the acquisition or merger of existing business enterprises, but rather the formation of an entirely new market (Fraser v. Major League Soccer, 2000).

 

Summary and Conclusions

In short, all profession sport entities have been plagued with antitrust challenges over the years. The nature of the restrictive rules and policies imposed by professional sport leagues make them more vulnerable to antitrust legal action. With the exception of baseball, to some extent, all other major professional sports have had to adapt their rules and policies to comply with antitrust law. However, sport leagues claim that when they employ restrictive policies they are engaging in legitimate business purpose because of the atypical nature of the business in sports requires them to adopt such measures to assure their business survival. In other industries, perhaps, the business activities of professional sport organizations would be considered illegal.

Given by the shear volume of antitrust violation lawsuits against professional sport leagues in the past decade this trend shows no signs of slowing down. Particularly with individual players and class action lawsuits against professional sport leagues for restrictive labor practices such as salary caps. For years now the major professional sport leagues in the United States have lobbied, unsuccessfully, in Congress to gain exemption from antitrust violations on restrictive business policies.

A recent trend in professional league sports has been the structuring of professional leagues as a single-entity to avoid antitrust violations. In the 1970’s many professional leagues have tried to use this defense but were unsuccessful (e.g., NFL). In the late 1990s, however, in Fraser v. MLS (2000), MLS successfully employed the single-entity defense at least partially due to the way in which the league was initially structured. Other new (e.g., WNBA) and established professional sport leagues may follow the example of MLS because as Frasier v. MLS showed, structuring a professional sports league in a similar manner could mean exemption from of Sherman Act Section 1 violations.

A greater state of uncertainty is added by the Court’s inconsistent antitrust analysis of professional sport leagues over the years. While some courts have interpreted the cooperative nature of the business of professional sport teams as a single entity (e.g., Frasier v. Major League Soccer, 2000), others have viewed professional sport teams as independent competing entities (e.g., Los Angeles Memorial Coliseum Commission v. NFL, 1984; North American Soccer League v. National Football League, 1982) and therefore liable of antitrust violations under the Sherman Act. Piraino (1999) has asserted that, this state of uncertainty “has never been reconciled by the Supreme Court”. The inconsistency of the Courts in regulating the business activity of professional sports has left “the leagues free to exact monopoly profits from consumers”. Furthermore, Piraino has argued that the Courts should focus their attention on the professional sport league’s business conduct and not on their business structure (Piraino, 1999).

Due to the general Court’s inconsistency in regulating the business activity of professional sports, leagues have adopted restrictive policies that significantly limit local competition from other teams by restricting the award of new franchises and the relocation of existing ones. The consequence of such policies is the arbitrary increase in ticket prices and the creation of an “artificial scarcity of professional sport franchises”. The artificial scarcity of professional franchises has given existing franchises “leverage power” by threatening relocation unless greater local government subsides are provided. Leverage power has resulted in the construction and renovation of taxpayer funded stadiums. Furthermore, the “closed market” state of professional sports has driven the value of professional sport franchises beyond a realistic open market value. For instance, from 1986 to 1998 the MLB Cleveland Indians club’s value increased 374 percent, from $35 million to $322 million, the value of the NBA Orlando Magic franchise went from $33 million to $134 million in just 9 years, that is a 406 percent increase. The consumer of professional sports carries the final burden by paying more for ticket prices than they would have in an open market and by paying increased local taxes used to fund substantial subsides awarded to professional sport franchises (Piraino, 1999).

As Piraino has contended, most of the confusion and problems surrounding professional sports and antitrust statutes would be resolved if the Courts viewed the business of professional sport leagues as classic joint ventures instead of a unique single-entity form of business organization. By adopting this view, professional sport leagues would be regulated according to well-established jurisprudence of other traditional joint venture businesses. With this analysis, professional sport leagues would be allowed to engage in restrictive policies that promote and protect their unique blend of cooperation and competition while “limiting competition in ways beyond those necessary to achieve the legitimate objective of their joint venture” (Piraino, 1999).

 

References

American Football League v. National Football League, 323 F. 2d 124 (1963).

Bridgeman v. National Basketball Association, 675 F. Supp.960 (1987).

Brown v. Pro Football, Inc., 116 S. Ct. 2116 (1996).

Chicago Professional Sports Limited Partnership v. National Basketball League, 95 F. 3d 593 (1996).

Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S 200 (1922).

Flood v. Kuhn, 407 U.S. 258 (1972).

Fraser v. Major League Soccer, 97 F. Supp. 130 (2000).

Independent Entertainment Group, Inc. v. National Basketball Association, 853 U.S. 333 (1994).

Levin v. National Basketball Association, 385 F. Supp 149 (1974).

Los Angeles Memorial Coliseum Commission v. National Football League, 726 F. 2d 1381 (1984).

Molinas v. National Basketball Association, 190 F. Supp. 241 (1961).

McCourt v. California Sports, Inc., 600 F. 2d. 1193 (1979).

National Basketball Association v. Williams, 45 F. 3d 684 (1995).

North American Soccer League v. National Football League, 670 F. 2d 1249 (1982).

Philadelphia World Hockey Club, Inc. v. Philadelphia Hockey Club, Inc., 351 F. Supp 462 (1972).

Toolson v. New York Yankees, 346 U.S. 356 (1953).

Wood v. National Basketball Association, 602 F. Supp. 525 (1984).

Cotten, D. J., & Wolohan, J. T. (2003). Law for recreation and sport managers (3rd ed.). Dubuque,IA: Kendall/Hunt Publishing Company.

Cozzillio, M. J., & Levinstein, M. S. (1997). Sports law: cases and materials. Durham, NC: Carolina Academic Press.

McMahon, J., & Rossi, J. (1995). A history and analysis of baseball's three antitrust exemptions. Villanova Sports and Entertainment Law Journal, 2, Forum 213.

Oram, M. D. (2000). Stadium financing and franchise relocation act of 1999. Virginia Journal of Sports and the Law, 2, 184.

Piraino, T.A. (1999). A proposal for the antitrust regulation of professional sports. Boston University Law Review, 79, 889.

Picher, T. (1997). Baseball's antitrust exemption repealed: An analysis of the effect on salary cap and salary taxation provisions. Seton Hall Journal of Sport Law, 7, 5.

Wong, G. (2002). Essentials of amateur sport law (3rd ed.). Dover, MA: Auburn House Publishing.

 

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