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NFL Cross-Ownership Rules – Crossing the International Dateline

By [Thursday, July 18th, 2013]

NFL Shahid KhanOff-season news in the NFL includes Jaguars owner Shahid Khan’s purchase of a soccer team – the English Premier League’s Fulham club.  He’s the third NFL owner, and sixth American, to buy into the Premier League.  Stan Kroenke, owner of the St. Louis Rams, owns a controlling interest in Arsenal, and Malcom Glazer, owner of the Tampa Bay Buccaneers, owns Manchester United.  (Randy Lerner, who owns Aston Villa, used to also own the Cleveland Browns.)

This latest transaction prompts reflection on the history of the NFL’s rules banning cross-ownership of teams in other leagues, which has evolved over the years in response to court rulings and changing market conditions.  Although the ban has never been applied to sports leagues in other countries, in view of business globalization and Internet access to far-flung entertainment sources, it’s worth considering the risks and benefits of NFL owners expanding their portfolios in this direction.

Reactive, not proactive, describes the NFL’s approach to its members’ interest  in owning teams in other leagues.  In the 1950s, as other professional football leagues tried to gain a foothold, the NFL Commissioner first announced a policy against a team owner maintaining a controlling interest in a team of a competing league.  Various League resolutions more formally banning cross-ownership were adopted in the late 1960s and 1970s.  This development came in part as a response to the emergence of the North American Soccer League, whose main cheerleader was Lamar Hunt, owner of the NFL’s Kansas City Chiefs.  Finally, in 1978, the NFL amended its Constitution and Bylaws to expressly prohibit a majority owner, or one of the owner’s close relatives, from having a controlling or substantial interest in another major team sport, defined to include baseball, basketball, hockey, and soccer.  In the ugly antitrust battle that ensued between the NASL and the NFL, a federal appellate court struck down the NFL’s cross-ownership ban on the grounds that it adversely affected competition in the capital market for the purchase of sports franchises (see NASL v. NFL).

In the aftermath of the 1980s antitrust litigation, the League operated as if the cross-ownership ban was still in effect, but authorized occasional exceptions (e.g., permitting Wayne Huizenga to own both the Miami Dolphins and Florida Marlins, and permitting Paul Allen to own both the Seattle Seahawks and Portland Trail Blazers).  The League codified this approach in an amendment to its Constitution and Bylaws that allows cross-ownership in another major league sports team in two narrow circumstances: (1) if the two franchises are in the same city, or (2) if the other league’s franchise is in a neutral market, defined as one that doesn’t currently host an NFL team and is not deemed a potential NFL city. Enforcement of the rule has been flexible, giving new controlling owners of NFL teams time to divest conflicting interests, and to do so in creative ways — for instance St. Louis Rams owner Stan Kroenke was allowed to satisfy the rule by transferring ownership interest in his Denver clubs (the NBA Nuggets and the NHL Avalanche) to his son Josh Kroenke.  Push has never really come to shove, however, and it is unclear how the NFL would have applied its current cross-ownership ban if Kroenke had been the winning bidder for the L.A. Dodgers back in 2012 (the League considers the L.A. market to be a potential team location although there’s no NFL team there now).

The NFL’s current cross-ownership rules arguably creates efficiencies that should save it from antitrust scrutiny.  Prohibiting certain types of owner involvement in other leagues assures owners will focus their efforts on the NFL’s success.  Cross-ownership creates special problems in leagues like the NFL where much of the revenue is shared among team owners.  Conflicts of interest could arise over negotiations for national broadcast rights if owners had teams in different leagues in multiple cities.  In this setting, the ban is necessary to block owners from freeriding on the investments of their fellow owners, for example, by using a league’s confidential information and business methods to assist a league in another professional sport.  Thus, there’s little conceptual difference between the NFL’s cross-ownership ban and widely-endorsed  joint venture non-competition agreements that are designed to secure members’ undivided loyalty.  On the other hand, on balance it makes sense to allow owners to take advantage of economies of scale and operational synergies created through ownership of multiple franchises in the same city.  To the extent the NFL plays a role in competition at the local level for sponsorship, ticket sales, luxury suite sales, etc., limiting cross-ownership to the same city or a neutral market defuses any risk that an NFL owner could abuse cross-ownership access to confidential competitive business information about another team’s local competitive efforts.

NFL owners’ move into international sports raises the question whether its time for the NFL to think more proactively about its ownership rules.  Are there ways to structure them to encourage certain investments that create synergies?  Are there international markets that the NFL wants to protect?  Are there risks to the NFL’s future success as owners branch out in this direction?

Will Antitrust Immunity Shield MLB in San Jose Franchise Relocation Suit?

By [Wednesday, June 19th, 2013]

MLB logoSan Jose, California has been trying to get a Major League Baseball team to move there for over 20 years.  First the San Francisco Giants, now the Oakland Athletics.  As many frustrated cities have done, when all else fails, bring an antitrust lawsuit.

In San Jose v. Commissioner of Baseball, the city charges that baseball’s famed antitrust exemption does not extend to its unlawful conduct in requiring a super-majority vote to allow a team to relocate.  This alleged restraint on the competition among cities for MLB franchises apparently has had particularly nefarious effects on San Jose.  It has been unable to fund and construct a sports venue that would become a “catalyst for urban transformation or revitalization.”

The main impetus for the lawsuit is the imminent expiration of the two-year option agreement that San Jose executed with the Oakland A’s back in November 2011.  The agreement granted the A’s an option to purchase 5 acres of prime downtown real estate to build a ball park.  But nothing in the agreement promises that the A’s will actually move.  And without an MLB vote to approve the A’s relocation, the team will not exercise the option.  One reason that vote has been delayed is the San Francisco Giants assertion that their franchise territory extends to San Jose.

The biggest hurdle facing the complaint is the so-called baseball antitrust exemption.  Setting the stage for yet another battle to reverse that jurisprudential anomaly, the complaint provides an extensive, albeit one-sided, history of sports antitrust litigation brought against the other major leagues in the context of franchise relocation, intellectual property licensing, and television rights.  Legal scholars have long been befuddled by this exemption, and maybe the time is finally right to even the antitrust playing field among major league sports.

Union Dissolution and the Nonstatutory Labor Exemption

By [Monday, June 17th, 2013]

Although it already seems like ancient history to sports fans, the 2011 NFL and NBA lockouts are still generating their share of legal scholarly attention.  Three recent law review articles offer differing perspectives on the players’ efforts to dissolve their unions to be able to invoke the antitrust laws against the leagues, and thereby gain bargaining leverage. 

The Washington Law Review features a student comment that focuses on the distinction between the two methods of dissolving a union — disclaimer of interest and full-fledged decertification — and its significance to the nonstatutory labor exemption as articulated in Brown v. Pro Football Inc..  The nonstatutory labor exemption is a judge-made doctrine that holds that unions and employers should not be exposed to antitrust liability for the duration of the collective bargaining relationship, even after expiration of the CBA and even if the parties’ negotiations are at impasse.  Although the exact contours of the exemption are still fuzzy, the  Brown Court suggested that the nonstatutory labor exemption lasts until the “collapse” of the collective bargaining relationship.  The open question has been whether and what type of dissolution of the union qualifies as “collapse.”  Decertification is a lengthy process requiring the players to round up at least 30% of their members to file a formal petition with the NLRB, followed by a formal election that achieves a majority vote in favor of decertification.  Disclaimer of interest merely requires the union to announce it is terminating its right to represent the players, and can be done simply by sending a letter to the league declaring it is no longer the players’ bargaining agent.  The student comment opines that disclaimer does not satisfy the “collapse” standard because of its informal nature and instantaneous effect.  The comment further argues that courts should extend the nonstatutory labor exemption in the event of a disclaimer for the length of a “business cycle” in the subject industry, to ensure it is not being used merely as a bargaining tactic.

Posing an interesting counterpoint to this argument is an article in the U.C. Davis Law Review, contending that extending the nonstatutory labor exemption to cover post-dissolution agreements would subvert both federal labor and antitrust policy.  To this author the issue is not whether the players dissolved the union simply as a bargaining tactic, but whether employees are entitled — whatever their motives — to unilaterally return at any time to a labor market under free competition principles.  

An article in the Vanderbilt Journal of Entertainment and Technology Law makes the point that dissolution of a players’ union, by either disclaimer of representation or full-fledged decertification, marks a new era in sports industry labor battles, confounding the expectations of commentators and requiring a second look at league lock-out strategies.  

If the leagues pull back from that strategy, the courts may not get the chance to further define the nonstatutory labor exemption any time soon.

Baseball’s Antitrust Exemption Part II: Baseball vs. Other Sports

By [Thursday, April 25th, 2013]

A major problem with baseball’s exemption from federal antitrust laws is that it applies only to baseball.  What about baseball is so different from other sports that they don’t also enjoy the antitrust exemption?  NOTHING.  There is no difference between the business of baseball and the business of other sports and therefore there is no reason for one to be exempt when the others are not.

The Supreme Court’s reluctance to undo this anomaly was based on baseball’s reliance on the exemption over the decades; the exemption has been weaved into baseball’s structure.  For example, baseball’s minor league system differs from the other sports leagues, and wouldn’t work the same without the exemption.  However, other leagues have managed without an exemption and have figured out how to bring players up from high school and college into the sport.  Baseball could do the same thing.  They can get rid of the minor league system all together or they can figure out a system that works within the antitrust laws.  Hockey and Basketball both have minor league systems even though they are not exempt.  There are also various independent baseball leagues that are run without the exemption.  It’s not too late or too onerous for baseball to rearrange its system so that it fits within the exemption.

Even though other sports are not exempt doesn’t mean they haven’t tried to get the exemption expanded to them.  In 1955, the United States brought charges against boxing promoters for violating the Sherman Act.  The lower courts relied on Toolson and Federal Baseball in their dismissal, but the Supreme Court reversed, stating that the holdings in the two baseball cases did not reach beyond the business of baseball.  In 1957, William Radovich, who played for the Detroit Lions, sued the National Football League under the antitrust laws.  The lower courts dismissed the case based on Federal Baseball and Toolson.  The Supreme Court reversed, again saying that these holdings did not reach beyond the business of baseball.  In 1971, action was brought challenging the legality of some of the National Basketball Association rules.  Spencer Haywood played for the Denver Rockets after signing a Uniform Player Contract.  After a dispute with the team, Haywood stopped playing, and signed with the Seattle Supersonics.  Without reliance on, or even reference to any of the baseball decisions, the court said, “The NBA conducts its business in such a manner as to constitute interstate commerce. …The court orders that partial summary judgment in favor of plaintiff Haywood be granted, to the limited extent of ruling that the NBA’s four-year college rule . . . is a violation of Section 1 of the Sherman Act,”  Denver Rockets v. All-Pro Management, Inc., 325 F.Supp. 1049, 1066-1067 (C.D. Cal. 1971). 

In every case involving professional sports that are not baseball, the courts have decided declined to expand the exemption and have subjected those sports to the antitrust laws.  The Federal Baseball exemption is now limited to “the business of baseball,” with no other distinguishing factor.  The exemption has thus become an anomaly based purely on historical accident without substantive justification.  On this basis alone, the courts should eliminate the exemption.

Baseball’s Antitrust Exemption Part I: Then vs. Now

By [Thursday, April 25th, 2013]

The Supreme Court of the United States has issued three opinions in baseball antitrust cases, each time holding the antitrust laws inapplicable to the business of baseball, and each time getting the issue WRONG.  In 1922, Justice Holmes decided in Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922) (“Federal Baseball”), that baseball was exempt from antitrust laws.  Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953) (Toolson”) and Flood v. Kuhn, 407 U.S. 258 (1972) (“Flood”), followed Federal Baseball, and kept the exemption in place.  Yet, no legally significant evidence supports the conclusion that baseball alone among major league sports should be exempt from these laws.  It’s time for a change.  In Flood, however, the Court announced it won’t reverse course until Congress makes a move.  Meanwhile, Congress has said it won’t act as long as the Court upholds the exemption.  This exemption is an anomaly and it’s time for Congress to take action to level the playing field for baseball.

The basis for the exemption was first announced in Federal Baseball when the Court concluded that baseball did not involve “interstate commerce” — a threshold requirement for application of the antitrust laws.  Justice Oliver Wendell Holmes wrote: “The clubs composing the Leagues are in different cities and for the most part in different states.  …these clubs shall play against one another in public exhibitions for money, one or the other club crossing a state line in order to make the meeting possible.”  But Justice Holmes reasoned that this travel does not mean that baseball involves interstate commerce because “the business is giving exhibitions of base ball, which are purely state affairs.  …the transport is mere incident, not the essential thing.  …  Personal effort, not related to production, is not a subject of commerce.  That which in its consummation is not commerce does not become commerce among the States because the transportation that we have mentioned takes place.”  In other words, the travel was deemed incidental and not part of the business of baseball.  The money was made from the actual playing of the game, which was deemed purely an in-state affair, even though teams could not meet to play without traveling across state lines.

The hollowness of this reasoning became quickly apparent when one year after Federal Baseball,  Justice Holmes wrote for the Court in Hart v. B.F. Keith Vaudeville Exchange, 262 U.S. 271 (1923), that transporting a vaudeville show’s “apparatus” across state lines might be sufficient to subject the business to the federal antitrust laws.  He offered no basis for his conclusion that moving show apparatus across state lines was interstate commerce, but moving baseball equipment was not.  Courts continued to distinguish Federal Baseball from other cases involving exhibitions and entertainment that crossed state lines merely because they were not in the business of baseball.

Things are different today than they were at the time of Federal Baseball.  In 1922, baseball was America’s national pastime.  In order to see a game, a person had to be in that state, in that city, in that stadium.  Ninety years later, viewing a baseball game does not depend on the spectator’s presence in the stadium in a particular state.  To see a game, a person can be anywhere and only has to turn on a television, turn on a radio, open the internet, or check updates on a cell phone.  The popularity and profitability of baseball has increased, and this is partially due to the availability of baseball games crosses state lines.  Baseball has changed, the business of baseball has changed, and thus the laws regulating baseball should also change.