Janet L. McDavid David Michnal December 11 2003 The Interplay of Antitrust Law with Sports League Rules Hogan Lovells | Competition & Antitrust - USA Janet L. McDavid, David Michnal Competition & Antitrust Stating a Claim under Section 1 of the Sherman ActAbbreviated Rule-of-Reason Analysis On January 3 2003 Ohio State University running back Maurice Clarett lifted college football's national championship trophy. Seven months later, the National Collegiate Athletics Association (NCAA) initiated an investigation into whether Clarett violated NCAA rules by accepting improper financial and academic assistance while at Ohio State University.Depending on its findings, the NCAA could suspend Clarett for a long period of time or even declare him ineligible to participate in NCAA collegiate athletics. Clarett's dilemma is further complicated by a National Football League (NFL) rule that prohibits a prospective player from entering the NFL player draft until three years have elapsed since his high-school graduation. As Clarett has challenged the NFL under the antitrust laws, the case may become the latest collision between sports and antitrust law.Stating a Claim under Section 1 of the Sherman ActA successful legal challenge to the NFL rules regarding player eligibility would likely focus on Section 1 of the Sherman Act, and seek either damages or an injunction against the rules. To state a claim under Section 1, a plaintiff must allege the existence of a contract, combination or conspiracy that unreasonably restrains trade. Assuming no standing or jurisdictional issues, a plaintiff's case hinges on the existence of an agreement and the 'reasonableness' of the restraint. Courts categorize competitive restraints as either per se unlawful or subject to the rule of reason. Per se illegal restraints are those that have a "predictable and pernicious anti-competitive effect, without any potential for pro-competitive benefit", and have typically been limited to price fixing, bid rigging, and allocating markets or customers. Those with potential for pro-competitive effects are subject to the rule of reason, which examines the overall competitive effects of the restraint.The first major obstacle to a Section 1 claim against a professional sports league is proving that an agreement exists. Since the US Supreme Court's decision in Copperweld Corp v Independence Tube Corp,(1) which held that a corporation and its wholly owned subsidiary could not conspire because they constituted a single entity, courts have wrestled with Copperweld's application to sports leagues. In Brown v Pro Football, Inc(2) the court suggested that, in the context of collective bargaining, professional sports teams are not completely independent competitors because they depend on cooperation with each other for their existence. However, in Sullivan v NFL(3) the First US Circuit Court of Appeals held in a suit brought by a team owner against the league that the NFL's members were capable of conspiring because they were not a single entity under Copperweld. The Seventh Circuit split the difference in Chicago Sports Ltd v NBA,(4) concluding that Copperweld's reasoning does not dictate a concrete answer to the single-entity question, but rather might require an analysis "one league at a time - and perhaps one facet of a league at a time".Once an agreement is established, courts generally evaluate restraints promulgated by sports leagues under the rule of reason. As the Supreme Court explained in NCAA, sports leagues and their members "market…competition itself.…Of course, this would be completely ineffective if there were no rules…to create and define the competition to be marketed".(5) While acknowledging that price fixing and output limitations are ordinarily condemned as illegal per se, the court applied the rule-of-reason test, explaining that the per se rule is inappropriate in "an industry in which horizontal restraints on competition are essential if the product is to be available at all".(6)Under the rule of reason, courts weigh the anti-competitive effects of the rule against the justification proffered for the rule. Section 1 is violated when a court finds that an anti-competitive effect outweighs the justifications for the rule, or that the rule was not a reasonably less restrictive alternative to accomplish a legitimate goal.In a decision reached earlier this year, the Sixth Circuit evaluated an Ontario Hockey League rule that effectively precluded former college hockey players over the age of 19 from joining league rosters. The court ruled that the district court erred in applying the per se rule rather than the rule of reason. Accordingly, it evaluated the rule's competitive effects and reversed the trial court's grant of a preliminary injunction, reasoning that the plaintiff failed to allege that the restraint had an anti-competitive effect in any relevant market.(7)Abbreviated Rule-of-Reason AnalysisIn cases involving restraints that have an obvious anti-competitive effect, courts may apply an abbreviated rule-of-reason analysis. As NFL rules have rarely been subjected to rule-of-reason analysis, analogies must be drawn from sports cases not involving the NFL. In Law v NCAA(8) the Tenth Circuit considered whether NCAA-imposed salary limits for college basketball coaches violated antitrust laws. The court observed: "Where a practice has obvious anti-competitive effects - as does price fixing - there is no need to prove that the defendant possesses market power. Rather, the court is justified in proceeding directly to the question of whether the pro-competitive justifications advanced for the restraint outweigh the anti-competitive effects under a 'quick look' rule-of-reason." Applying the 'quick look' rule-of-reason analysis to a restraint on basketball coaches' salaries, the court concluded that the rule violated Section 1 because it did not serve its stated purpose of creating a level playing field among NCAA member schools.Professional sports league rules and regulations are sometimes the subject of collective bargaining. If a rule negotiated during the collective bargaining process is a proper subject for collective bargaining, that rule is likely immune from antitrust laws under the National Labour Relations Act.(9) Thus, as long as the NFL rule is a proper subject of collective bargaining under the act, Section 1 claims are unlikely to succeed.Before mounting an antitrust challenge to a sports league's rules, an athlete like Clarett should carefully weigh the obstacles to successful litigation. Despite the successful challenge to a nearly identical NBA rule in 1971,(10) success in a Section 1 claim against any sports league is far from certain. A challenge to a league's rules may be an expensive endeavour financially and may take years to resolve. Further, challenges to league rules under Section 1 must address the unique considerations that apply to sports leagues generally. A prospective plaintiff must: determine whether the professional sports league rule was a subject of collective bargaining; assess the likelihood that the league will be considered a single entity under Copperweld and thus unable to conspire; and evaluate the substance of the Section 1 claim - that is, whether the anti-competitive effects of the rule outweigh the pro-competitive effects.In the end, a successful challenge to the NFL's rules may very well turn on issues common to all Section 1 claims such as market definition and competitive effects. However, prospective plaintiffs must also evaluate the unique considerations that result from using laws designed to preserve competition against industries that market competition. For further information on this topic please contact Janet L McDavid or David J Michnal at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected] or [email protected]). Endnotes(1) 467 US 752 (1984).(2) 518 US 231 (1996).(3) 24 F 3d 1091 (1st Cir 1994).(4) 95 F 3d 593 (7th Cir 1996).(5) 468 US at 101. 6) Id at 100.(7) NHLPA v Plymouth Whalers Hockey Club, 325 F 3d 712 (6th Cir 2003).(8) 134 F 3d 1010 (10th Cir 1998).(9) Wood v NBA, 809 F 2d 954 (2nd Cir 1987).(10) Denver Rockets v All-Pro Management, Inc, 325 F Supp 1049 (CD Cal 1971).