Thursday, November 23, 2006

Antitrust and Sports Leagues

I recently read a review of a book about Curt Flood's fight against baseball's old "reserve clause." (scroll down a bit for it). The Flood case dealt with a somewhat narrow issue, but it brings to mind an issue that has always bothered me: The consideration and treatment of team sports leagues under the antitrust laws.

It seems to me that many people have a misconception, under which they view individual teams as companies competing in the market. Thus, they seem to equate Red Sox-Yankees competition with Dell-HP competition. But to me this is not an appropriate comparison. The Red Sox-Yankees are to a great extent on the same team, that is, the Major League Baseball team. They both benefit when the league itself is doing well. Dell and HP, by contrast, are cutthroat competitors. The real competition for the Red Sox, Yankees and MLB is really the NFL, NBA, etc.

In essence, what you have with team sports leagues is an entity that is based on internal competition. The entity's success depends on the appeal of the internal competition model it creates.

As a result, it seems to me that the entity should be able to set up the internal competition structure however it wants to. It could have one owner who employs all the individual teams and players. Or it could have multiple owners, but with strict controls on movement of players between teams. Or it could have the teams act as individual competing entities, with no resrictions of any sort. But regardless of which model the league operates under, I'm not sure there should be any antitrust concerns (unless the league is trying to prevent other competing leagues from starting up (e.g. through predatory pricing).)

UPDATE: After writing this quickly off the top of my head, I thought it might be worth researching it a bit. I see there is a recent paper somewhat on point: I'm going to try to give it a read soon. Here's the abstract:

Professional sports leagues enjoy a unique justification in defending their seemingly anticompetitive practices under the antitrust laws: They allegedly need to maintain competitive balance. According to the argument, sports leagues need to do anticompetitive things to enhance their competitive standing vis-a-vis other sports leagues or other forms of entertainment. The argument is on the leading side of a circuit split, with only the D.C. Circuit rejecting it. Additionally, sports leagues have been adept at getting this argument into public discourse and legislative consideration. This Article argues that antitrust should reject the competitive balance argument on its face. The competitive balance argument makes the assumptions that there can only be one championship competition per sports league, that leagues can and will engineer balance in that unique competition, and that fan interest is directly related to that singular competition.

This Article draws on comparative data and recent economic research to conclude that each of these assumptions is wrong and that judicial endorsement of the competitive balance argument may simply be an aesthetic preference without empirical support. Instead, a solution lies in reconceiving the league competition envisioned by the competitive balance argument. In particular, a sports league can be subject to several different “competing competitions” among its constituent teams; it could thus maintain fan interest even in the absence of competitive balance. This view draws support from the experience of the decade-old English Premier League and also helps to illuminate Major League Baseball's litigation attempting to expand its intellectual property rights to limit fantasy baseball league operators.

UPDATE II: OK, I read (well, skimmed) the article and I'm glad I did. I kind of wish I had read it before doing the post, but what can you do? The authors' -- Temple Law professor Salil Mehra and Pepper Hamilton associate Joel Zuercher -- state that the main justification for not applying antitrust laws to sports league is the "competitive balance" argument. They explain:

the competitive balance argument can excuse restraints by reasoning that they are necessary to create the on-the-field competition that draws fans. Under this theory, competitive balance helps sports league compete with other forms of entertainment, including other sports leagues and “American Idol”- style reality television that may themselves provide “competing competitions.”

They then attack this argument on a number of grounds. For reasons to lengthy to go into (I'd have to write my own law review article to explain), I was not convinced. But what was most interesting to me was their mention of the "single entity" argument for not applying some antitrust rules to sports leagues. Under this arguement, they note,

horizontal agreements among competing teams in a sports league should receive completely unique treatment under the antitrust laws based on the proposition that leagues should be treated as a “single entity,” rather than being treated as a horizontal agreement among competitors. Such treatment would shift the analysis from Sherman Act Section One’s relatively strict prohibitions on horizontal restraints of trade to the more ambiguous strictures in Section Two’s restrictions of monopolization. Newer sports leagues, such as Major League Soccer, have attempted to structure themselves as single corporate entities with the constituent teams as subunits, in order to garner the relatively favorable antitrust treatment in the manner that the single-entity argument proposes.

This sounds a lot like what I was arguing. I'm happy to hear there is someone else who agrees! But alas, they also say: "However, the single entity argument has been largely rejected by courts."

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