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Antitrust Analysis of Sports Leagues

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Antitrust Analysis of Sports Leagues 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 (312) 322-0238 [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 - - 2 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 - - 3 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 - - 4 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 - - 5 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 - - 6 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.
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