Antitrust Analysis of Sports Leagues

348 Pages·2014·1.78 MB·English

Munich Personal RePEc Archive
Antitrust Analysis of Sports Leagues
Pelnar, Gregory
Lexecon
12 October 2007
Online at https://mpra.ub.uni-muenchen.de/5382/
MPRA Paper No. 5382, posted 20 Oct 2007 UTC
Antitrust Analysis of Sports Leagues

Gregory J. Pelnar

Lexecon
332 S. Michigan Ave.
Suite 1300
Chicago, IL 60604
[phone]
[email protected]

Draft: October 12, 2007
Table of Contents

Introduction 7

Chapter 1: What Is a Sports League? 9
A Brief History of the Major Sports Leagues in the United States 9
National Football League 10
Major League Baseball 12
National Basketball Association 13
National Hockey League 14
National Collegiate Athletic Association 16
Major League Soccer 18
Women’s National Basketball Association 19
Key Differences Between Sports Leagues 20
Sanctioning Bodies as a Form of Sports League 22
Economic Theories of Sports Leagues 23
Sports leagues as natural monopolies 23
Sports leagues as joint ventures 25
Sports leagues as cartels 27

Chapter 2: Basics of Antitrust Analysis 29
The Antitrust Laws 29
Exceptions to the Antitrust Laws 30
Judicial ‘interstate commerce’ exemption 30
Judicial ‘single-entity’ exemption 34
Statutory exemptions 37
Non-statutory exemptions 39
Proving Antitrust Violations 41
Proving violations of section 1 of the Sherman Act 41
Proving violations of section 2 of the Sherman Act 43
Proving violations of section 7 of the Clayton Act 49

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Chapter 3: Sports Leagues vs. Their Own Member Teams 51
Basics of Cartels 51
Basics of Joint Ventures 53
Externalities 56
Organizational problems 56
Joint venture instability 57
Team Antitrust Challenges to Sports League Rules and Policies 57
Public ownership restrictions 58
Sponsorship and licensing arrangements 61
Dallas Cowboys 61
New York Yankees 64
Television restrictions 67
NCAA 68
Chicago Bulls 72
Team relocation 75
San Francisco Seals 76
Oakland Raiders 77
San Diego Clippers 80
New England Patriots 81

Chapter 4: Sports Leagues vs. Rival Leagues 86
Federal League vs. Major League Baseball 86
American Football League vs. National Football League 90
American Basketball Association vs. National Basketball Association 93
World Hockey Association vs. National Hockey League 94
United States Football League vs. National Football League 96
North American Soccer League vs. National Football League 99
Table 4.1: The Impact of Teams in Other Sports Leagues on Live
Attendance 102
Table 4.2: The Impact of Teams in Other Sports Leagues on Television
Viewership 104

Chapter 5: Sports Leagues vs. Prospective Teams and Owners 106
Prospective Teams Seeking Admittance Into a Closed League 107
Mid-South Grizzlies v. NFL 107
Seattle Totems v. NHL 109
Bowl Championship Series 110
Prospective Owners 113
Levin v. NBA 113
Fishman v. Estate of Arthur M. Wirtz 114
Piazza v. MLB 118
Murray v. NFL 120
Baseball at Trotwood v. Dayton Professional Baseball Club 122
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Chapter 6: Sports Leagues vs. Players 125
NCAA 125
Restrictions on player compensation and team sanctions for compensation
restriction violations 126
Table 6.1: The Impact of NCAA Player Compensation Restrictions
on Rents Earned by Universities on Their Athletes 129
Restrictions on player eligibility – the no-draft and no-agent rules 131
Restrictions on academic eligibility 134
Restrictions on transferring to another academic institution 134
Restrictions on the number of athletic scholarships 137
Restrictions on the dollar value of athletic scholarships 140
MLB 141
The Reserve Clause 142
Table 6.2: The Impact of MLB’s Reserve System on Player
Salaries 144
Table 6.3: The Impact of MLB’s Reserve System on Competitive
Balance 149
Amateur Draft 153
Table 6.4: The Impact of MLB’s Amateur Draft on Competitive
Balance 154
Collusion 154
NFL 157
Blacklisting 158
Rozelle Rule, Revenue-Sharing, and Free Agency 159
Amateur Draft 166
Fixed Salaries 169
NBA 172
Four-year Rule 172
Player Opposition to the NBA-ABA Merger 173
Amateur Draft, Salary Cap, and Right-of-First-Refusal 174
NHL 177
Reserve Clause, Equalization Payments, Standard Player Contract, and
Amateur Draft 177
Van Ryn Rule 180
Salary Cap and Luxury Tax 181
MLS 182
LPGA 182

Chapter 7: Sports Leagues vs. Coaches 186
NCAA Limits on the Number of Assistant Coaches 186
NCAA Limits on the Salaries of Certain Assistant Coaches 188
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Chapter 8: Sports Leagues vs. Stadium Owners 191
NFL’s Los Angeles Rams’ Relocation to St. Louis 191
NASCAR’s Winston (now Nextel) Cup and Busch Series Dates 197

Chapter 9: Sports Leagues vs. Equipment Suppliers 210
NCAA Baseball 211
Professional Tennis 214
Professional Golf 216
Professional Bowling 220
Auto Racing 224

Chapter 10: Sports Leagues vs. Promoters/Sponsors, For-Profit Sports Camp Operators,
Merchandisers, and the Media 230
Promoters/Sponsors 230
NCAA 231
Postseason Rules 231
Two-in-Four Rule 240
NBA 244
Professional Tennis 247
Boxing 251
For-Profit Sports Camp Operators 254
Merchandisers 257
NCAA Restrictions on Manufacturer Logos on Team Uniforms 257
NFL’s Exclusive Licensing Arrangement with Reebok 261
The Media 264
Television Stations 265
College Football Association television exclusivity agreements 265
NFL’s blackout policy 271
NBA’s limit on the number of games broadcast on superstations 272
Other Media 273
PGA’s Real-Time Scoring System 273
Websites with Domain Names Similar to that of NFL Teams 276

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Chapter 11: Sports Leagues vs. Fans, Taxpayers, and the Federal Government 278
U.S. Government Antitrust Lawsuits Against Sports Leagues 278
Professional Boxing 278
NFL Blackout Policy 283
Table 11.1: The Impact of NFL Local Area Television Blackouts
on Live Attendance 292
Sports Fans’ Antitrust Lawsuits Against Sports Leagues 293
NFL’s Blackout Policy 293
Television Game Packages 296
NFL Sunday Ticket 296
NBA League Pass 299
Tying of Regular Season and Preseason Game Tickets 301
Price-fixing of Licensed Merchandise 305
League Suspensions of Teams 306
Unfair Labor Practices 307
Scheduling 308
Taxpayer Antitrust Lawsuits Against Sports Leagues 308

Chapter 12: Proposals to Curb Leagues’ Monopoly Power 311
Proposed Structural Remedies 311
Breaking Up Sports Leagues 311
Regulating Sports Leagues as Natural Monopolies 314
Mandating a Vertical Structure Where a Central Upstream Organization
Provides Competition-organizing Services for Independent
Downstream Teams 315
Mandating a System of Promotion and Relegation 316
Other Proposed Congressional Actions 318
Legislation Granting an Antitrust Exemption for Sports League Rules
Regarding Franchise Relocation 318
Legislation Curbing the Use of Tax Subsidies to Lure or Retain Sports
Teams 319
Rejection of the Competitive Balance Defense in Rule-of-Reason Analyses 320
Possible League Responses 321
Reorganization of the Major Sports Leagues Into Single-entity Structures 321

References 323

Cited Cases 342
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Introduction

The antitrust analysis of sports leagues, at first glance, appears to be utterly
confused. Why does Major League Baseball (MLB) have an antitrust exemption, but the
National Football League (NFL), the National Basketball Association (NBA), and the
National Hockey League (NHL) do not? Surely, there cannot be that much difference
between MLB and these other leagues. And, why didn’t the antitrust authorities – the
Antitrust Division of the U.S. Department of Justice (DOJ) and the Federal Trade
Commission (FTC) – oppose and stop the merger of the two major professional football
leagues (i.e., the National Football League and the American Football League) and the
two major professional basketball leagues (i.e., the National Basketball Association and
the American Basketball Association)? Surely, these were mergers to monopoly (or near
monopoly). Their combined market share in the relevant market had to be close to 100%.
What were the antitrust authorities thinking? And why do the antitrust authorities allow
sports leagues to negotiate broadcast deals on behalf of their members? Surely, this
increases the price that broadcasters must pay relative to what they could negotiate with
each league member individually.
On the other hand, sports leagues engage in a myriad of activities which have
attracted antitrust scrutiny. Leagues typically set rules regarding who is eligible to play,
how players will be assigned to teams, and the terms of those assignments. Leagues may
also impose a cap on teams’ player payrolls, or impose a ‘luxury tax’ on the teams with
the highest player payrolls. Aren’t these examples of the exercise of monopsony power
by sports leagues over the players?
Moreover, sports leagues typically set rules regarding the entry of new teams, the
purchase, sale, and relocation of existing teams, and the sharing of revenue among teams.
Leagues may attempt to limit the number of games a team can play, or the number of
televised games it can play. Leagues set rules over allowable and banned equipment.
Why do sports leagues adopt such rules and policies? Do they have an anticompetitive
effect? Do they have a procompetitive rationale?
The antitrust analysis of sports leagues is also interesting because it involves a
multitude of controversial economic issues. Are sports leagues cartels or are they better
understood as joint ventures? Are sports leagues natural monopolies? Do the rules and
policies adopted by sports leagues restrict output or enhance demand for their product?
And what is the ‘product’ produced by sports leagues? How does an incumbent sports
league respond to the entry of a rival league? Is it ‘vertical foreclosure’ if a team in the
incumbent league refuses to allow a team in the rival league to play at the same stadium?
Is the stadium an ‘essential facility’?
This book presents an overview of the antitrust analysis of sports leagues. Chapter
1 gives a brief history of the major sports leagues in the United States, discusses
differences among leagues, and examines how economists answer the question: “What is
a sports league?” Chapter 2 reviews the basics of antitrust analysis and their application
to sports leagues, including antitrust exemptions, rule of reason analysis, evidence of
monopoly and monopsony power (or, to use an analogous term, ‘market power’), and
market definition issues. Chapter 3 discusses antitrust disputes between sports leagues
and their own member teams over such issues as restrictions on the purchase, sale and
relocation of existing teams and the sharing of revenues. Chapter 4 examines antitrust
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disputes between rival sports leagues. Chapter 5 addresses disputes with teams from rival
leagues that want to join the league and prospective owners who want to purchase an
existing league team. Attention then turns to the input market. Chapter 6 addresses
antitrust disputes between sports leagues and players concerning issues like eligibility
restrictions, free agency, salary caps, and luxury taxes. Chapters 7, 8, and 9 examine
antitrust disputes between sports leagues and coaches, stadium owners, and equipment
suppliers, respectively. Attention then shifts to the output market. Chapter 10 discusses
antitrust disputes between sports leagues and promoters/sponsors, for-profit sports camp
operators, merchandisers, and the media. Chapter 11 investigates antitrust lawsuits
brought by fans, taxpayers, and the federal government against sports leagues over issues
such as team sanctions, league television packages, taxpayer-financed stadiums, and
league television blackout rules. Chapter 12 reviews proposals to curb the monopoly
power of professional sports leagues.
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Chapter 1

What Is a Sports League?

Economists, antitrust lawyers, and the courts have wrestled with the question:
“What is a sports league?” Is it a collection of competitors (i.e., teams) acting
collusively? If so, the league would seem to be a cartel. Or is the league a single entity,
with each team analogous to a subsidiary of a large corporation? If so, the league cannot
be colluding, because an entity cannot collude with itself – it has to collude with another
entity. Or is a league basically a joint venture undertaken by teams, similar to General
Motors and Toyota launching a joint venture to produce automobiles? If so, when is such
a joint venture anticompetitive and when is it procompetitive? Irrespective of the answers
to these questions is another: is a sports league a natural monopoly? Moreover, is it even
possible to answer such questions generally, or is there one set of answers specific to,
say, the National Football League and another set of answers specific to the National
Collegiate Athletic Association?
Not surprisingly, those who allege that certain activities of sports leagues violate
the antitrust laws view teams as engaged in an antitrust conspiracy, with the league
functioning as a cartel whose anticompetitive activities enhance the profits of its
members (the teams). Alternatively, those who allege a league is a single entity point out
that an entity cannot be engaged in an antitrust conspiracy only with itself. In contrast,
those who view sports leagues as joint ventures contend that league activities should be
evaluated under the “rule of reason.”
This chapter explores the question: “What is a sports league?” It begins with an
overview of the major sports leagues in the United States. This overview leads to a
discussion of some key differences, from an antitrust perspective, between the various
sports leagues and a discussion of sanctioning bodies as a form of sports league. It
concludes with an examination of competing economic answers to the question: “What is
a sports league?”

A Brief History of the Major Sports Leagues in the United States. The four major
professional sports leagues in the United States are the National Football League (NFL),
Major League Baseball (MLB), National Basketball Association (NBA), and National
Hockey League (NHL). The major collegiate sports league is the National Collegiate
Athletic Association (NCAA). Two of the newer professional sports leagues are Major
League Soccer (MLS) and the Women’s National Basketball Association (WNBA). This
section provides a brief history of these leagues, focusing primarily on their creation, the
rules and sanctions imposed on their members, their competition (and, in some cases,
merger) with rival leagues, and their attempt to limit player compensation.
The leagues’ histories are interesting because, today, the NFL, NBA, NHL, MLB,
and NCAA are entrenched incumbent leagues whose dominance appears unlikely to be
eroded by a new entrant. Yet, that dominance was not always the case, nor was their
future dominance ensured. Today, the major sports leagues are economic powerhouses
and it may be difficult to imagine a time when they were not. Thus, it is useful to review
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