As we all know, online advertising is almost impossible to escape. In fact, the average consumer in the United States sees about five thousand advertisements each day.[1] Even more frustrating to consumers is website publishers’ ever-increasing use of paywalls and subscriptions.[2] But publishers are not to blame. Google is. By monopolizing the digital ad tech market, Google has effectively diminished the monetary value of online advertising, forcing publishers to resort to paywalls and subscriptions to remain afloat.[3]
On January 24, 2023, the Department of Justice (DOJ) filed a Complaint against Google, alleging violations of the Sherman Act,[4] which imposes criminal penalties for monopolistic business practices.[5] Specifically, DOJ alleges that, through anticompetitive acquisitions and exploitation of its dominance in the tech industry, Google now controls the leading technology used by nearly every publisher and advertiser to buy and sell advertising space.[6] The Complaint compares Google’s practices to Goldman or Citibank owning the New York Stock Exchange.[7]
Digital Ad Technology
A brief breakdown of how advertisers purchase advertising space from publishers is necessary to understand the breadth of Google’s practices over the past two decades. Publishers sell space on their websites (referred to as inventory) that advertisers can buy to display their ads.[8] Inventory is offered by publishers either through direct sales (one-to-one negotiations with advertisers) or indirect sales, where inventory is offered through an intermediary, most commonly an ad exchange.[9] Ad exchanges are essentially auctions, where publishers offer ad space to advertisers and sell to the highest bidder.[10]
To facilitate these transactions, both advertisers and publishers use ad servers.[11] When a consumer accesses a website, the publisher’s ad server auctions the ad space through an ad exchange.[12] Advertisers use ad servers to connect them to these ad exchanges, make bids, and manage their ad campaigns.[13] Ad exchanges match advertisers and publishers by providing information about the website and the available ad space, and, depending on the scope of the ad exchange and the data available to it, provide information about the individual consumer viewing the website.[14] The figure below provides a simplified visual of the process, which collectively is referred to as the ad tech stack:[15]
Fig. 1
Google’s Takeover of the Ad Tech Stack
DOJ’s primary allegations rest on Google’s control of the entire ad tech stack. On the publisher side, Google owns the leading publisher ad server, Google Ad Manager, after its 2008 acquisition of DoubleClick for Publishers (DFP) for three billion dollars.[16] Google has grown DFP’s market share from sixty percent at the time of acquisition to ninety percent.[17] On the advertiser side, Google owns the leading advertiser ad servers, Google Ads and Display & Video 360 (DV360), as well as DoubleClick Campaign Manager, which manages advertiser’s ad campaigns.[18] Most importantly, Google’s 2008 acquisition of DoubleClick included the now-leading ad exchange AdX.[19] Google’s comprehensive ownership of the ad tech stack, on its own, would be unlikely to trigger violations of the Sherman Act. Nevertheless, Google has exploited its control over digital ad technology and siphoned an inconceivable fortune from the industry by stifling competition and innovation, depriving publishers of real choice and forcing advertisers to pay far more than they would in a competitive market.
Alleged Sherman Act Violations
In its Complaint, DOJ alleges violations under Sections 1 and 2 of the Sherman Act.[20] Section 1 prohibits contracts, combinations, and conspiracies “in restraint of trade.”[21] DOJ alleges that Google has engaged in unlawful tying of AdX and DFP in violation of Section 1 by effectively requiring publishers to use both technologies.[22] The Supreme Court has defined tying as “an agreement by a party [here, Google] to sell one product [here, DFP] on the condition that the buyer [here, publisher] also purchases a different (or tied) product [here, AdX], or at least agrees that he will not purchase from any other seller.”[23]
DOJ argues that Google has unlawfully tied AdX and DFP primarily by offering ad space on Google Ads exclusively through AdX and limiting real-time access to AdX to publishers that use DFP.[24] Because advertisers cannot afford to forego Google Ads as a revenue stream, virtually all advertisers bid for inventory on AdX.[25] Therefore, publishers are effectively forced to auction inventory on AdX to reach Google’s advertising demand.[26] Additionally, AdX is configured to provide lower prices to publishers who access AdX auctions through non-Google (non-DFP) ad servers.[27] Together, these practices amount to unlawful tying of AdX and DFP, and DOJ will likely argue away any potential defenses or justifications.[28]
Section 2 of the Sherman Act prohibits monopolizing, attempting to monopolize, or conspiring to monopolize.[29] DOJ alleges that Google has violated Section 2 by monopolizing the publisher ad server market (through DFP), monopolizing or attempting to monopolize the ad exchange market (through AdX), monopolizing the advertiser ad network.[30] DOJ asserts that Google increased and maintained its monopoly in each of the relevant markets by acquiring DFP and AdX, restricting access to AdX to DFP, manipulating auction bids to benefit AdX, acquiring competitors, and restricting publishers’ ability to transact with competitors or at preferred prices.[31] DOJ emphasizes that “[a]lthough each of these acts is anticompetitive in its own right, these interrelated and interdependent actions have had a cumulative and synergistic effect that has harmed competition and the competitive process.”[32]
Through these anticompetitive practices, Google has made a fortune. When advertisers purchase ad space from publishers through AdX, Google skims off some of the purchase price for itself.[33] Additionally, Google charges advertisers and publishers for use of its ad servers.[34] Per internal Google documents, Google estimates that it retains about thirty-five cents of every dollar spent on digital ads, primarily through AdX, where it charges twenty percent for ad space bought.[35] The figure below demonstrates how control of the ad tech stack has proved to be a cash cow for Google:[36]
Fig. 2
Google has constructed this money-grabbing structure through monopolistic practices, which, in turn, have reaped significant harm on advertisers, publishers, and the industry at large. DOJ alleges that Google has disrupted the sale of inventory, reduced publishers’ profits, harmed advertisers’ and publishers’ profitability by producing lower-quality transactions, and restricted choice and innovation throughout the ad tech stack.[37] The Complaint also lists the United States as an advertiser harmed by Google’s anticompetitive conduct, alleging that United States departments and agencies, including the Army, have incurred monetary damages as a result of Google’s conduct.[38] Though the overarching purpose of the Sherman Act is to protect consumers,[39] DOJ failed to identify specific harm to consumers or the general public, beyond stating that “Google’s anticompetitive acts have had harmful effects on competition and consumers.”[40] The Complaint briefly alludes to publishers’ increased use of subscriptions, paywalls, and alternative forms of monetization,[41] which potentially harm consumers by reducing access to information and Internet services. However, the Complaints fails to develop this connection between website monetization and consumer harm; rather, the emphasis is on the publishers’ ability to remain profitable through advertising alone.[42] Nevertheless, given that anticompetitive practices arguably always harm consumers, DOJ’s allegations may be sufficient.
As to remedies, DOJ seeks a judgment decreeing that Google violated the Sherman Act, damages to the United States for the monetary damages it incurred, the “divesture of, at minimum, the Google Ad Manager suite” (which includes DFP and AdX), and an injunction against further anticompetitive practices.[43]
Google’s anticompetitive practices described in this blog barely scratch the surface of DOJ’s claims. DOJ alleges a systemic, intentional takeover of the ad tech stack, characterized by tactful acquisitions, exploitation of Google’s customers and consumers, and secret projects that further entrenched Google’s monopoly. For example, in 2014, the Complaint describes ‘Project Bell,’ which lowered advertisers’ bids, without advertisers’ permission, to publishers who partnered with Google’s competitors.[44] Project Bell demonstrates the extent of Google’s anticompetitive scheme, which somehow thwarted the Federal Trade Commission (the agency charged with enforcing the Sherman Act, along with DOJ)[45] for nearly two decades.
When Google laid the first brick in its monopoly by acquiring DoubleClick (DFP and AdX), the FTC investigated but ultimately failed to challenge the acquisition, concluding that DFP’s sixty percent market share was insufficient to pose a risk of monopoly.[46] Had the FTC pursued its initial investigation, Google’s chokehold on digital ad tech may have been avoided. Nevertheless, the FTC’s failure to act likely gave Google the confidence to openly flaunt its unlawful practices, providing DOJ with ample evidence to bring the Sherman Act down on its monopoly.
[39] Robert H. Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & Econ. 7, 11 (1966) (arguing that “the legislative intent underlying the Sherman Act was that court should be guided exclusively by consumer welfare”).
[42]Id. at 118-119 (alleging that, as a result of Google’s practices, advertisers purchase less inventory from “publishers that internet users rely upon to generate and disseminate important content, and ultimately fewer publishers are able to offer internet users content for free (without subscriptions, paywalls, or alternative forms of monetization)”).
More than one year after the Supreme Court’s 9-0 decision in National Collegiate Athletic Association v. Alston that the NCAA is not exempt from the Sherman Act with respect to certain compensation rules, the floodgates have opened for student-athletes to profit from their name, image, and likeness (“NIL”).[1] However, the Court’s majority opinion in Alston did not cover the NCAA’s rules governing NIL deals in college athletics—it only covered compensation rules regarding education-related benefits provided directly to student-athletes by member schools.[2] Allowing NIL deals was instead a direct result of changing public opinion about compensation in college sports and changes in state law, and an indirect result of Alston.[3] The 9-0 opinion was perhaps a signal that the only thing America agrees on is that the NCAA does not fairly compensate athletes.
Despite the narrowness of Alston’s holding, NIL deals had their moment in Justice Kavanaugh’s concurrence, which was an absolute censure of the NCAA’s compensation rules, including endorsement deals (i.e., NIL deals).[4] Just as “[l]aw firms cannot conspire to cabin lawyers’ salaries in the name of providing legal services out of a ‘love of the law,’” the NCAA cannot price-fix labor by defining the product of college sports as amateurism.[5] If the NCAA had any remaining thought that some of its other compensation rules would be easily exempt from the purview of the Sherman Act if later challenged, Kavanaugh’s concurrence was a resounding “no.”
On June 30, 2021, only eight days after the decision in Alston, the NCAA announced that all three divisions had adopted interim rules suspending its previous NIL rules.[6] The interim policy provided four new rules.[7] First, college athletes are allowed to “engage in NIL activities that are consistent with the law of the state where [their] school is located.”[8] Second, if an athlete’s school is located in a state with no NIL law, then he or she can engage in NIL activities “without violating NCAA rules related to name, image and likeness.”[9] Third, athletes “can use a professional services provider, [like an agent,] for NIL activities.”[10] Fourth, athletes must report NIL activities to their schools.[11]
Following this announcement, states quickly moved to pass laws allowing college athletes to receive compensation.[12] For example, Roy Cooper, Governor of The Center of the College Basketball Universe[13] and the state that is home to the greatest college basketball program in history (i.e., the University of North Carolina at Chapel Hill), issued an executive order allowing NIL deals two days after the NCAA announced its interim policy.[14]
Contrary to the NCAA’s arguments against paying college athletes, the product of college sports has remained essentially the same since the adoption of the interim policy—16.3 million people watched UNC beat Duke to end Coach K’s career in the Final Four without a care in the world that the game likely featured some of the most highly compensated athletes in college sports.[15]
However, the NCAA’s original concern—that NIL deals are used to indirectly induce athletes to attend certain schools—remains, and several other concerns have emerged since the NCAA adopted interim rules.[16] New concerns include college athletes’ potential liability under tax law[17] and federal securities laws and regulations[18] due to a general lack of knowledge about how these laws impact them.
Federal Income Tax Liability
Over the last year, college athletes have learned that “in this world nothing can be said to be certain, except death and taxes.”[19] College athletes’ federal income taxes are complicated by a number of issues. First, they file a Form 1040 income tax return as independent contractors after receiving a Form 1099-NEC (i.e., non-employee compensation)[20] or some other variation of a Form 1099[21] from companies with whom they have entered into NIL deals.[22] This requires them to aggregate all 1099s they have received throughout the year when filing their tax return.[23] In comparison, “traditional workers” in the United States file their Form 1040 after receiving a Form W-2 that includes their salary and wages for the year.[24]
Second, college athletes could unintentionally underreport gross income due to the intricacies of the Internal Revenue Code (“IRC”) and related Treasury Regulations. Section 61(a)(1) of the IRC provides that gross income specifically includes “compensation for services, including fees, commissions, fringe benefits, and similar items.”[25] Compensation includes both cash and non-cash compensation, such as cars provided by dealerships or products from companies.[26] If college athletes receive non-cash compensation, then they must include in their income as compensation the fair market value of the property taken in payment.[27] Thus, if they receive something like a car in exchange for use of their NIL, they have gross income in the amount of the fair market value of the car (or fair market rental value, if the car is leased). Further, college athletes’ receipt of payment in the form of cryptocurrency further complicates computation of gross income for federal income taxes.
Liability Under Federal Securities Laws
NIL deals for endorsing a cryptocurrency may expose college athletes to federal securities laws if the cryptocurrency is a “security” under the Securities Act of 1933. A security is broadly defined under the Securities Act to encompass many different types of instruments, including investment contracts.[28] Whether an instrument is an investment contract for purposes of the Securities Act depends on a fact-specific analysis under the Howey test.[29] In Howey, the Court held that investment contract means “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”[30]
If a college athlete promotes a cryptocurrency that is a security under the Howey test, then he or she is subject to federal securities laws, including anti-touting provisions.[31] Under Section 17(b) of the Securities Act, it is unlawful for any person to “publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received, directly or indirectly from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.”[32]
Thus, a college athlete promoting a cryptocurrency that is a security “must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”[33] Further concerns for potential liability under federal securities laws arise from “violations of the anti-fraud provisions of the federal securities laws, [as well as] from participating in an unregistered offer and sale of securities.”[34]
Possible Future NIL Regulations
Since the NCAA adopted its interim policy allowing compensation from NIL deals, it has not issued many regulations or clarifications on possible sources of income or potential issues for athletes. However, we will likely see more regulations come to fruition in the future. The past year has shown that it is necessary for schools to educate athletes on liability issues and encourage them to seek guidance from agents or other professionals with knowledge of the significant implications that arise from endorsement deals.
[1] See e.g., Max Escarpio, College Football’s Most Unique NIL Deals in 2022, Bleacher Report, https://bleacherreport.com/articles/10045014-college-footballs-most-unique-nil-deals-in-2022 (last visited Oct. 17, 2022); College Basketball NIL Rankings, On3NIL, https://www.on3.com/nil/rankings/player/college/basketball/ (last visited Oct. 17, 2022); Sarah Eberspacher et al., National Collegiate Athletic Association v. Alston, JD Supra (June 22, 2021), https://www.jdsupra.com/legalnews/national-collegiate-athletic-8794641/.
[2] Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2166 (2021) (Kavanaugh, J., concurring).
[3] Alex Silverman, From Name, Image and Likeness to Pay for Play, Americans Increasingly Support Compensation for College Athletes, Morning Consult (June 29, 2021 4:07 PM), https://morningconsult.com/2021/06/29/nil-college-athletes-compensation/.
[13] Governor of the State of North Carolina, Proclamation that North Carolina is The Center of the College Basketball Universe (March 30, 2022), https://governor.nc.gov/media/3007/open.
[17] Ron L. Brown, Tax Implications When NCAA Student Athletes Make Money, Kiplinger (July 21, 2022), https://www.kiplinger.com/taxes/604955/tax-implications-when-ncaa-student-athletes-make-money#:~:text=Those%20with%20NIL%20deals%20or,employed%20Internal%20Revenue%20Service%20guidelines.
California Attorney General Rob Bonta (A.G. Bonta) filed a Complaint against Amazon.Com, Inc. (Amazon) in San Francisco Superior Court claiming the tech company violated California’s Cartwright Act and California’s Unfair Competition Law.[1] A.G. Bonta believes the lawsuit has a good chance of success despite the dismissal of a nearly identical claim brought by Washington D.C. Attorney General Karl Racine (A.G. Racine) against Amazon in the Superior Court of the District of Columbia.[2] A.G. Bonta believes California’s pro-consumer state laws distinguish California from D.C. and will result in a favorable outcome for California.[3]
The Complaint filed by A.G. Bonta claims that Amazon’s market power gives it the ability to coerce third party sellers and wholesalers into agreeing to contractual provisions that promote anticompetitive conduct.[4] The Complaint alleges Amazon’s Retail Price Parity agreements are anticompetitive in nature because they require sellers to sign a Business Solutions Agreement, forcing sellers to agree to Amazon Marketplace’s “Program Policies.”[5] Program policies include agreeing to Retail and Wholesale Price Parity Provisions.[6] These contractual provisions prohibited retail sellers and wholesalers from listing their products for a lower price than their Amazon-listed price on any other channel of sale.[7]
The Complaint claims the price parity agreements are anticompetitive because they allow Amazon to insulate itself from competition, place barriers to entry, charge higher prices to consumers, and prevent consumers from benefiting from the full output of low prices across online retail stores that they would experience in a freely competitive market.[8] A.G. Bonta claimed Amazon’s anticompetitive practices have effectively set a price floor costing both California retailers and consumers money.[9] California’s Complaint claims Amazon violated the state’s Cartwright Act.[10] The Cartwright Act is consumer friendly because it prohibits trusts from creating restrictions in trade or commerce.[11] California’s Business and Professional Code defines a “trust” as a “combination of capital . . . or acts by two or more persons” and prevents trusts from creating restrictions in trade or commerce; increasing the price of any commodity; preventing competition; and fixing prices.[12] He believes this lawsuit is important to combat the severe and far-reaching implications Amazon’s market power and coercive pricing tactics have on consumers.[13]
California state law may result in a successful lawsuit despite the dismissal of a nearly identical lawsuit, filed in Washington, D.C. by A.G. Racine against Amazon, earlier this year.[14] D.C.’s lawsuit, like California’s, claims Amazon violated D.C.’s antitrust laws for barring third-party sellers from offering their products for lower prices on other online retail channels.[15] The D.C. Complaint claimed Amazon’s anticompetitive practices violated § 28-4502 of the District of Columbia Antitrust Act (the Act).[16] The Act provides “[e]very contract, combination in the form of a trust or otherwise, or conspiracy in restraint of trade or commerce all or any part of which is within the District of Columbia is declared to be illegal.”[17] The Act uses broader language and lacks the explicit limitations on restraints on trade the California’s Cartwright Act places on trusts.
The D.C. Superior Court granted Amazon’s motion to dismiss the claim.[18] Amazon argued using pricing restrictions in contracts is a common and legal practice in the retail industry.[19] The court determined D.C.’s Complaint failed to state an anticompetitive effect under D.C. law.[20] While the D.C. Superior Court found D.C. failed to state a claim, California’s claim provides numerous examples of Amazon engaging in conduct prohibited by California state law and harmful to consumers.[21] A.G. Bonta was able to learn from the D.C. Superior Court ruling to ensure the Complaint included enough evidence to show Amazon’s Pricing Parities have an anticompetitive effect.[22]
The outcome of the D.C. lawsuit against Amazon did not deter A.G. Bonta from filing the lawsuit against Amazon. He believes California’s pro-consumer state law allows for the possibility of a more favorable result in California than in D.C.’s claim against Amazon.[23] The outcome of this case will be influential on future litigation against Big Tech companies.[24] Depending on the outcome, other states looking to curb Big Tech’s anticompetitive tactics will look to legal decisions made from this case and apply them.[25] It will be interesting to see whether California’s pro-consumer state law results in a different outcome and whether California will be able to provide a greater amount of evidence
[1] Complaint at 1, People of California v. Amazon.com, Inc., No. CGC-22-601826 (Cal. Super. Ct. Sept. 15, 2022), 2022 WL 4289172.
Since 2017, Google has racked up over $8 billion in fines from the European Union (“EU”) for antitrust violations.[1] The heftiest is a $5 billion (€4.34 billion) fine—the largest fine ever imposed by the European Commission (“EC”) for an antitrust violation.[2]
The EC is the primary enforcer of EU competition laws.[3] In 2017, the EC fined Google $2.7 billion for abusing its dominance in the market to boost its own shopping comparison tool over that of competitors.[4] In 2018, the EC handed out a fine of $5 billion, finding that Google forced smartphone makers to preinstall its apps and other functions exclusively.[5] The most recent fine came in 2019, when Google was hit with a $1.7 billion fine concerning its online advertising practices.[6]
The EU’s competition laws roughly mirror those of the United States. American antitrust jurisprudence began over a century ago[7] with the enactment of the Sherman Antitrust Act of 1890 (“Sherman Act”),[8] which comprises two sections. Section 1 of the Sherman Act prohibits agreements amongst competitors that unreasonably restrain trade.[9] Section 2 of the Sherman Act prohibits monopolization and attempts to monopolize by one entity.[10] Section 2 does not forbid an entity from merely existing as a monopoly power or having market dominance.[11] A violation of section 2 involves two elements: “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”[12]
EU antitrust law is based in Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”).[13] Article 101 focuses on anticompetitive agreements amongst competitors or “cartels,” while Article 102 focuses on monopolization or “abuse of dominance” of a single entity.[14] Like the Sherman Act, Article 102 does not consider market dominance to be illegal per se—but in both systems, using that dominance to restrict competition is an illegal violation.[15]
In 2001, Microsoft was prosecuted for violating section 2 of the Sherman Act for allegedly tying its operating system, Windows, to its internet browser Internet Explorer.[16] This made it difficult for computer manufacturers, such as Dell or HP, to distribute products made by Microsoft’s competitors.[17] The court found that Microsoft had a market share exceeding 95% of the market for Intel-compatible PC operating systems.[18] Microsoft, though, argued that this was incorrect and that the court had excluded other relevant market competitors—namely, Apple’s Macintosh Operating System (“Mac OS”).[19] Microsoft alleged that Apple’s Mac OS “has competed with Windows for years” and thus, the court’s definition of the market was too narrow.[20] The court, however, determined that Windows and Mac OS were not interchangeable for consumers due to the considerable difficulty in switching from Windows to Mac OS, the higher price of Mac OS, and the fewer applications supported on Mac OS.[21] The Circuit Court affirmed the District Court’s findings of a monopoly, the first element in a section 2 violation.[22] Microsoft also failed to justify the decision to integrate its web browser and operating system, thereby violating the second element of section 2.[23] Because there was no procompetitive explanation offered for the decision to tie Internet Explorer to Windows, the court found that Microsoft violated section 2.[24]
Now, nearly two decades later, Google has been hit with nearly identical charges.[25] The EC found that Google established market dominance comparable to that of Microsoft in 2001, at over 90% “in the markets for general internet search services, licensable smart mobile operating systems and app stores for the Android mobile operating system.”[26] Google’s Android operating system powers 80% of smartphones in Europe and around the world.[27] The EC found that Google abused its dominance by “requiring manufacturers to pre-install Google Search and Google’s Chrome browser . . . as a condition to license certain Google proprietary apps,” namely, the Google Play Store, the marketplace for Android-compatible smart phone applications.[28] By conditioning the licensing of the Google Play Store on manufacturer’s agreement to preinstall Google Chrome and Google Search, Google seems to have effectively made the same error as Microsoft—illegally tying its products together in order to maintain its longstanding monopoly power.
Like Microsoft two decades ago, Google has disputed the EU’s findings. In a statement by CEO Sundar Pichai, Google claims that its business model surrounding Android (which is free to download and implement) creates more choice for consumers, not less.[29] By allowing Android to be used across many manufacturer’s devices, Google claims that it has enhanced “[r]apid innovation, wide choice, and falling prices” which are “classic hallmarks of robust competition.”[30] Google even raises the same defense as Microsoft—by pointing fingers at Apple. In his statement, Pichai states that the EU’s definition of the market “ignores the fact that Android phones compete with iOS phones.”[31]
Google has appealed the 2018 decision to the European Court of Justice in Luxembourg.[32] Although Google hopes to have the EC’s decision completely annulled,[33] if history tells us anything, the outcome for Google looks bleak.
[13] Consolidated Version of the Treaty on the Functioning of the European Union art. 101-02, Oct. 26, 2012, 2012 O.J. (C 326) 88–89 [hereinafter TFEU]; see also Implementing EU Competition Rules: Application of Articles 101 and 102 of the TFEU, EUR-Lex, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=legissum%3Al26092 (July 31, 2015) [hereinafter Implementing EU Competition Rules].
[14]Implementing EU Competition Rules, supra note 13.
[15] European Commission Press Release P/18/4581, Antitrust: Commission Fines Google €4.34 Billion for Illegal Practices Regarding Android Mobile Devices to Strengthen Dominance of Google’s Search Engine (July 18, 2018), https://ec.europa.eu/commission/presscorner/detail/en/IP_18_4581.
[16] United States v. Microsoft Corp., 253 F.3d 34, 63–64 (D.C. Cir. 2001).
Horizontal restraints are unlawful per se unless a court can identify some redeeming virtue that such restraints may create. In National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (“NCAA”),[1] the Supreme Court rejected this standard, refusing to condemn horizontal restraints on price and output imposed by the NCAA without specifying any possible redeeming virtues.[2] The Court emphasized that other restraints not before the Court were necessary to create and maintain athletic competition like that supervised by the NCAA.[3] This exemption for sports leagues ensures that all restraints imposed by such entities merit Rule of Reason scrutiny, regardless of how harmful they appear.
Building on a forthcoming article,[4] this Essay contends that NCAA’s sports league exemption contravenes traditional antitrust principles, including the ancillary restraints doctrine (which NCAA ignored). This Essay also argues that the exemption increases the number of false negatives and potentially impedes the conduct of Rule of Reason analysis. Finally, this Essay explains how the exemption inspired and informed an ill-advised doctrinal innovation, the so-called “Quick Look” methodology of Rule of Reason analysis, whereby courts condemn certain restraints “in the twinkling of an eye.”[5] Some lower courts have recently extrapolated from this approach and exempted restraints limiting rivalry for the services of student athletes from Rule of Reason scrutiny, rendering such restraints lawful per se.[6]
The United States Supreme Court is currently reviewing the Ninth Circuit’s holding in National Collegiate Athletic Association v.Alston, which condemned NCAA regulations limiting the size of athletic scholarships.[7] This Essay provides the Alston Court with a roadmap for eliminating the sports league exemption, thereby placing such restraints on equal footing with restraints imposed by other entities. The Essay also advises the Court to reject lower court decisions that built upon the Quick Look doctrine and have treated restraints governing student athlete eligibility as lawful per se, thus exempting them from Rule of Reason scrutiny. Finally, the Essay concludes that the restraints before the Court in Alston may well produce cognizable antitrust benefits by overcoming the market failure that would result from unbridled rivalry for the services of student athletes. The Essay submits that the Court should articulate a Rule of Reason methodology in Alston that reflects the non-technological nature of such efficiencies.
II. The Rule of Reason and the Per Se Rule
The Sherman Act bans agreements “in restraint of trade.”[8] In Standard Oil Co. of New Jersey v. United States,[9] the Court read the Act to prohibit only agreements that restrain trade “unreasonably,”[10]i.e., produce monopoly or its consequences: higher prices, reduced output. and/or reduced quality.[11] Ordinary application of this Rule of Reason is fact-intensive, requiring plaintiffs to establish that the restraint produces concrete antitrust harm.[12] But certain restraints are “unlawful per se,” and do not warrant full-blown analysis.[13] In Northern Pacific Railway Co. v. United States (“NPR”), the Court articulated a two-part standard for determining whether restraints in a particular category are always unreasonable and thus unlawful per se.[14]NPR requires courts to ask two questions about restraints in the category: do such restraints produce a “pernicious effect on competition” and, if so, do they also always lack redeeming virtues.[15]
Despite NPR’s reference to pernicious effects, application of this first prong does not require a judicial prediction that restraints will produce actual economic harm.[16] Instead, courts treat elimination of rivalry as itself a “pernicious effect.”[17] Numerous garden variety restraints, including formation of partnerships and restraints ancillary thereto, produce a “pernicious effect” under this prong.[18] Whether this standard condemns a restraint thus turns on the second prong, namely, whether restraints lack redeeming virtues.[19] For example, price fixing between two independent lawyers is unlawful per se because such agreements cannot create redeeming virtues.[20] But formation of a partnership by the same lawyers might produce redeeming virtues and thus merits Rule of Reason treatment.[21] Both restraints extinguish horizontal price rivalry. But formation of the partnership may also produce redeeming virtues.[22]
The NPR standard post-dates the ancillary restraints doctrine.[23] But both doctrines ultimately ask the same question about horizontal restraints: can eliminating rivalry also produce efficiency benefits? While the NPR standard takes a categorical approach, the ancillary restraints doctrine applies case-by-case.[24] Repeated applications of the ancillary restraints doctrine could establish that particular categories of restraints never or sometimes produce redeeming virtues, thus informing application of the NPR standard.[25]
If restraints cannot produce such virtues, courts may safely conclude that parties have invested resources to create an agreement that restricts rivalry with no prospect of efficiencies. This conclusion implies that the parties believe they can exercise market power.[26] Even if the parties are incorrect, condemnation of such restraints does no harm and deters future price fixing.[27]
If restraints may produce such virtues, further inquiry is warranted regarding their ultimate impact. Moreover, a court assessing such restraints under full-blown Rule of Reason analysis must begin by assuming that the restraint before it might produce such benefits and calibrate the methodology of such inquiry accordingly.
The Court initially recognized very few redeeming virtues, limiting the category to what Nobel Laureate Oliver Williamson describes as technological efficiencies.[28] Beginning with Continental T.V. v. GTE Sylvania, Inc.,[29] the Court has repeatedly recognized a different category of virtues—namely, correction of market failures that would occur if parties to the restraint had instead continued unbridled rivalry.[30] As this Essay submits, the methodology of full-blown Rule of Reason analysis should turn upon the nature of these virtues.
III. NCAA’s Misapplication/Ignorance of NPR and Resulting Sports League Exemption
In Board of Regents of the University of Oklahoma v. National Collegiate Athletic Association,[31] the Court evaluated an agreement setting the price and output of televised college football games.[32] Plaintiffs University of Georgia and University of Oklahoma, who presumably supported restrictions on player compensation, challenged the price and output restrictions.[33] Courts at the time defined redeeming virtues narrowly in the horizontal context, banning as unlawful per se restraints that seemed plainly ancillary to legitimate ventures.[34] Nonetheless, the Tenth Circuit rejected automatic condemnation, at least arguendo, and assessed whether the restraints were ancillary to the NCAA’s legitimate venture.[35] Answering this question in the negative, the court condemned the restraints.[36]
The defendants reiterated their invocation of the ancillary restraints doctrine in the Supreme Court in NCAA.[37] However, the Court did not mention the NPR standard or the ancillary concept. Thus, the Court did not ask whether the restraints might produce redeeming virtues or enhance the efficiency of a valid venture. Instead, the Court immunized the restraints before it from per se condemnation because the NCAA had adopted other restraints not before the Court that would survive per se condemnation.[38] Such other restraints included horizontal agreements ensuring that players were bona fide students and were not semi-professional athletes that vaguely associated with the university.[39] These latter rules, the Court said, included bans on paying players.
Lower courts, including the Ninth Circuit in In re National Collegiate Athletic Association Athletic Grant-in-Aid Cap Antitrust Litigation (“Alston”),[40] have properly read NCAA to exempt restraints imposed by sports leagues from per se condemnation, regardless of whether the restraint may produce redeeming virtues.[41] As Professor Hovenkamp has explained, this exemption would “shelter an agreement between member schools fixing the price of admission tickets or of hot dogs purchased in the stands.”[42] Unlike restraints that merit Rule of Reason scrutiny because they survive the NPR standard or the ancillary restraints test, restraints enjoying the sports league exemption will necessarily include entire categories of restraints that would ordinarily be unlawful per se because they cannot produce redeeming virtues. Thus, courts cannot assume there is some probability that such restraints might produce redeeming virtues. Instead, courts must assume that application of NPR’s second prong would condemn some such restraints as unlawful per se.
By invoking restraints not before it to justify the sports league exemption, the Court assumed that such restraints would themselves avoid per se condemnation. This assumption was surprising, given the Court’s recent condemnation of apparently beneficial horizontal restraints in decisions it expressly reaffirmed.[43] While the Court admitted that restrictions on player compensation prevented price competition, it opined that unbridled rivalry for the services of student athletes would transform the NCAA into a semi-professional league, tarnishing the league’s brand—college football—associated with an academic tradition.[44] The Court analogized such restraints to vertical agreements that simultaneously restricted intra-brand rivalry but enhanced inter-brand competition by overcoming market failure.[45] Lower courts have read this language as retracting the scope of the per se rule vis a vis horizontal restraints more generally.[46]
IV. The Sports League Exemption Has No Basis
NCAA’s sports league exemption saved numerous restraints, including those before it, from a substantially overinclusive per se rule.[47] Many such restraints were likely procompetitive. Perhaps the exemption was a second-best tactic for mitigating the anti-consumer impact of an overly broad per se rule. The Supreme Court, however, has undermined this justification by narrowing the scope of the per se rule. Moreover, this exemption contradicts basic antitrust principles and has produced other negative consequences, including an additional and stronger exemption, as described below in Part V.
The Court did not explain why antitrust treatment of restraints not before it determines the per se status of those restraints that are. Horizontal cooperation is necessary to create and maintain numerous other ventures besides sports leagues.[48] However, courts do not immunize restraints imposed by such other ventures from per se condemnation simply because the restraints accompany a valid venture. Instead, courts employ the ancillary restraints doctrine to test whether such restraints might produce cognizable benefits that further the venture and thus warrant an additional fact-based assessment.[49] The content and nature of this threshold inquiry assumes that sometimes the answer to this question will be “no.” That is, some restraints that accompany an otherwise valid joint venture cannot produce any cognizable benefits but will instead simply reduce rivalry simpliciter.[50] Courts condemn such restraints while allowing the venture to proceed.[51]
Robert Bork, who rehabilitated the ancillary restraints doctrine, endorsed this approach in a path-breaking article.[52] Bork explained that horizontal restraints that accompanied lawful ventures were not ancillary if they were “incapable of adding to the efficiency of the integration which they seemingly accompany.”[53] Bork instanced a restrictive covenant that accompanied formation of a “product safety testing laboratory” by horizontal rivals.[54] The formation and operation of the laboratory would constitute lawful concerted action, just like formation and continued operation of the NCAA.[55] Still, Bork concluded that the covenant could not be ancillary and was thus unlawful per se.[56] Bork’s analysis confirms that is no reason to treat restraints that accompany sports leagues more favorably than those that accompany other ventures when applying the NPR standard.
V. Retaining the Sports League Exemption Does Positive Harm
Perhaps the sports league exemption is a case of “no harm, no foul.” Most exempted restraints would merit Rule of Reason scrutiny under more recent applications of the NPR standard anyway. Moreover, both NPR and Rule of Reason analysis ultimately ask whether challenged restraints produce monopoly or its consequences.[57]Per se condemnation reflects a conclusion that Rule of Reason analysis will condemn the restraint.[58] As shown below, however, the sports league exemption still does positive harm, both by weakening the per se rule and also by distorting related aspects of antitrust doctrines. In particular, the exemption has contributed to a distortion of the methodology of Rule of Reason analysis that courts apply and not merely those adopted by sports leagues.
V.A. The Sports League Exemption Deters Legitimate Challenges and Increases False Negatives.
Full-blown Rule of Reason analysis is not free. Plaintiffs must expend resources to establish a prima facie case by proving either: (1) the restraint produces actual detrimental effects or (2) the parties possess the economic power necessary to impose harm.[59] Defendants can contest these assertions, further increasing adjudication costs. Plaintiffs fail to establish such a case 97 percent of the time.[60] Presumably, numerous potential plaintiffs do not attempt such a showing, leaving harmful restraints unchallenged. Knowing this, defendants will, at the margin, adopt some unambiguously harmful restraints they otherwise would not have adopted, knowing, as they will, that the sports league exemption will raise the bar for plaintiffs challenging such restraints.[61] In sum, the sports league exemption both increases the number of false negatives and encourages additional harmful restraints.
V.B. The Sports League Exemption Distorts the Rule of Reason Methodology That Courts Employ.
Rule of Reason methodology should turn upon the nature of possible redeeming virtues that save restraints from per se condemnation. Application of the NPR standard and ancillary restraints doctrine, both of which NCAA ignored, identifies the relevant virtues, if any, that restraints might produce. If such virtues are technological, the three-part Rule of Reason test applied in Alston and informed by NCAA is generally appropriate.[62] Proof of higher prices (or in Alston, reduced compensation) should establish a prima facie case, casting upon the defendants a burden to adduce evidence of such efficiencies.[63] If defendants satisfy this burden, plaintiffs can prove a less restrictive alternative or show that the restraint’s harms exceed its benefits.[64] This framework assumes whatever benefits defendants prove coexist with the harms that plaintiffs purportedly demonstrated to establish a prima facie case.[65]
However, some restraints survive per se condemnation because they may produce non-technological efficiencies by overcoming market failure.[66] Here, a price-based standard makes no sense. If restraints overcome market failure, pre-restraint prices reflect a poorly functioning market that the restraint corrects. Such prices are not a useful benchmark for comparison to post-restraint prices. Instead, proof that post-restraint prices exceed the pre-restraint baseline is entirely consistent with a conclusion that the agreement overcomes a market failure and produces redeeming virtues, the prospect of which resulted in Rule of Reason treatment.[67] Antitrust procedure thus precludes allowing plaintiffs to prevail based solely upon such evidence.[68]
Moreover, once a plaintiff does make out a prima facie case in whatever way, proof that the restraint produces significant non-technological benefits undermines the rationale for balancing benefits against harms. Such balancing presumes that the restraint produces simultaneous harms and benefits, like a merger to monopoly that generates economies of scale that may offset the transaction’s harms.[69] However, a defendant’s showing that a restraint overcomes a market failure undermines the assumption that benefits coexist with harms.[70] Instead, the evidence is at least equally consistent with the conclusion that the restraint only produces benefits—benefits that manifest themselves as prices higher than those produced by the pre-restraint, poorly functioning market.[71] Similar logic undermines the search for “less restrictive” alternatives, because there is no reason to assume that the challenged restraint is “restrictive” in the first place.
The sports league exemption deprives courts of the information necessary to ascertain what Rule of Reason methodology makes sense. Alston may be such a case.
V.C. The Exemption Encouraged Adoption of an Ill-Considered “Quick Look” Methodology of Rule of Reason Analysis.
The restraint before the Court in NCAA expressly set price and output. Without identifying any redeeming virtues, the Court nonetheless assessed the restraints under the Rule of Reason, because they accompanied a sports league and were thus exempt from the NPR standard.[72] The Court began by invoking the District Court’s findings that the restraint had increased prices compared to a (hypothetical) non-restraint baseline.[73] Absent possible redeeming virtues, this price-based method of making out a prima facie case made perfect sense. Nonetheless, the NCAA contended that the plaintiffs’ case should fail absent proof that the defendants possessed sufficient shares of a properly defined market.[74]
The Court could have invoked its ultimate conclusion that the defendants did, in fact, possess a large share of a properly defined market.[75] Instead, the Court issued a broader pronouncement, applicable well-beyond the case before it, regardless of a defendant’s market position. In a passage that quoted National Society of Professional Engineers v. United States,[76] the Court announced:
As a matter of law, the absence of proof of market power does not justify a naked restriction on price or output. To the contrary, when there is an agreement not to compete in terms of price or output, ‘no elaborate industry analysis is required to demonstrate the anticompetitive character of such an agreement.’[77]
The Court also quoted Professor Areeda’s assertion that some restraints were so obviously harmful that courts could condemn them “‘in the twinkling of an eye.’”[78]
The Court’s quotation of Professional Engineers suggests that it equated “naked” restraints with those that could not produce redeeming virtues.[79] Combined with the “twinkling of an eye” metaphor, this language inspired the so-called “Quick Look” methodology of Rule of Reason analysis.[80] Under this approach, plaintiffs may avoid establishing actual detrimental effects or market power if they convince the tribunal that, while not unlawful per se, the restraint is nonetheless “inherently suspect.”[81] Initially, some proponents touted the Quick Look as a pro-defendant “safety valve” that tempered an overbroad per se rule.[82]
As a matter of decision theory, this approach makes perfect sense in a case like NCAA. If a particular class of restraint is usually anticompetitive and rarely, if ever, produces benefits, the chance of false positives is extremely low. Reducing plaintiffs’ burden of establishing a prima facie case would (properly) encourage such challenges and minimize the resources expended on litigation.
However, advocates and courts have not confined the Quick Look to restraints deemed “naked” because they lack redeeming virtues.[83] Indeed, the Alston plaintiffs began their argument before the Supreme Court by attempting to expand the definition of “naked,” contending that the challenged restraints were “naked,” despite the finding below that they produced significant benefits.[84] Moreover, scholars and courts have held out the possibility that a restraint may be inherently suspect and thus subject to the Quick Look, regardless of whether it is “naked” as defined by NCAA.[85] Once courts and agencies created the Quick Look methodology, plaintiffs naturally pressed courts to declare numerous restraints “inherently suspect,” hoping to eliminate the burden of establishing antitrust harm.[86] The result has been an increase in expensive and distracting disputes about whether various restraints are “inherently suspect”—disputes that defendants almost always win.[87] The cost of such disputes produces no offsetting social benefits, as failure to establish that a restraint is inherently suspect relegates plaintiffs to the standard requirement to prove anticompetitive harm anyway.
To be sure, a more expansive definition of “inherently suspect” could seemingly lighten plaintiffs’ burdens in a larger number of cases. However, proponents of the Quick Look have not offered a tractable methodology for distinguishing “inherently suspect” restraints from those properly assessed under full-blown Rule of Reason analysis.[88] Absent such a methodology, the pro-plaintiff Quick Look is probably best reserved for those restraints that do not merit Rule of Reason scrutiny in the first place—a set that would be empty if courts properly and uniformly applied the NPR standard and ancillary restraints test.
In any event, the Quick Look has always rested on shaky jurisprudential ground.[89]NCAA’s suggestion that the nakedness of a restraint itself establishes a prima facie case was dicta, given the district court’s finding that the restraint produced actual detrimental effects.[90] Moreover, Professor Areeda’s “twinkling of an eye” metaphor described a hypothetical case in which courts determined at the summary judgment stage that defendants possessed a dominant market position and thus market power.[91] This conclusion did not support any suggestion that the mere existence of a restraint, no matter how apparently harmful, could itself establish a prima facie case.[92] Finally, while the Supreme Court has endorsed the Quick Look in concept,[93] it has never condemned a restraint under the Rule of Reason without first finding that the agreement produced concrete anticompetitive harm.[94]
Moreover, NCAA’s assertion that “naked” restraints should themselves establish a prima facie case regardless of market share or anticompetitive effects was dicta, given the Court’s holding that the plaintiffs had in fact established market power and actual detrimental effects. Finally, the actual agreement before the Court, which could not produce redeeming virtues, bore little meaningful resemblance to restraints such as those in Alston that could produce such virtues. It would thus be hazardous, to say the least, to generalize these dicta to apply to potentially beneficial restraints.[95] Indeed, the only restraints that would seem analogous to those before the NCAA Court are those that should be condemned as unlawful per se in the first place. NCAA’s unjustified exemption of the restraints before it from per se condemnation thus inspired a methodology of Rule of Reason analysis that was in fact only appropriate for restraints that were not properly subject to Rule of Reason analysis in the first place.
V.D. NCAA Inspired a New and More Powerful Exemption.
NCAA spawned another, more powerful exemption, one squarely before the Court in Alston. The Quick Look’s logic cuts both ways. If some restraints that survive per se condemnation are almost always harmful on balance, presumably some are nearly always beneficial. An antitrust regime could reflect this fact, making it especially difficult for plaintiffs to establish a prima facie case and/or easier for defendants to rebut such a case. Over a decade ago, the Seventh Circuit embraced such logic, holding that a NCAA Bylaw is “presumed procompetitive” when it is “clearly meant to help maintain the ‘revered tradition of amateurism in college sports’ or the ‘preservation of the student-athlete in higher education.’”[96] The court built upon dicta in American Needle, Inc v. National Football League,[97] which itself invoked NCAA’s mistranslation of Professor Areeda’s “twinkling of an eye” metaphor.[98]
Defendants have invoked this line of precedent, albeit without the term “Quick Look,” preferring instead the phrase “twinkling of an eye.”[99] Indeed, this pro-defendant approach is really a rule of per se legality and thus an outright exemption from antitrust scrutiny for covered restraints because the “presumption” in favor of such restraints is irrebuttable.[100] It is likely no coincidence that this pro-defendant irrebuttable presumption arose in the context of sports leagues in general and the question of student athlete eligibility in particular. After all, the very existence of NCAA’s sports league exemption broadcasts that “sports are different” and are therefore susceptible to more relaxed antitrust scrutiny than more mundane commercial endeavors. Thus, a pro-plaintiff methodology born from an unjustified sports league exemption has morphed into a second and more ironclad exemption. This Essay contends that the Court should reject this exemption as contrary to antitrust doctrine and policy.[101]
VI. What the Court Can Do About It In Alston
What, then, can the Supreme Court do to correct for this untethered and harmful sports league exemption and the subsequent doctrinal consequences described above? Most aggressively, the Court could order re-argument and add three questions for consideration: (1) are all restraints imposed by sports leagues exempt from per se condemnation under the NPR standard?; (2) do restraints such as those reviewed in Alston possibly produce redeeming virtues?; and (3) if so, what are those virtues? After such re-argument, the Court could overrule that portion of NCAA creating the sports league exemption, while reiterating the condemnation of express limitations on price and output of televised games.[102] The Court would then have to face the question that has eluded a fully considered decision since 1984, namely, whether horizontal restrictions on player compensation can produce redeeming virtues and thus survive per se condemnation under the NPR standard.
The Court could also take a different approach altogether, confining itself to the present record and arguments. The Court could still begin by noting that it is only applying the exemption arguendo because neither party challenged it. It could also note that it generated the exemption when courts misapplied the NPR standard and banned bona fide ancillary restraints, such that the exemption saved many procompetitive restraints from wrongful condemnation.[103] The Court could then note that, given today’s more accurate application of the NPR standard, the exemption no longer performs this function.[104] Such a statement could encourage lower courts to abandon the exemption, teeing up Supreme Court review.
Application of the exemption would ordinarily preclude consideration of whether the challenged restraints might produce redeeming virtues until after the plaintiff establishes a prima facie case. But the Alston Court could answer this question before a full-blown analysis. The defendants’ bid to exempt their restraints from even Rule of Reason scrutiny necessarily assumes that such restraints usually, or even always, produce redeeming virtues by protecting and enhancing the amateur nature of NCAA sports from unbridled rivalry for players.[105] While not a sufficient condition for such an exemption, this assumption is certainly necessary.[106]
Recent commentary and some questions at oral argument, however, seem to take issue with this threshold assumption by, for instance, analogizing limits on player compensation to putative limits on coaches’ salaries.[107] The latter, of course, would be unlawful per se absent the sports league exemption.[108] Indeed, the plaintiff began its oral argument by characterizing the restraints before the Court as “naked horizontal monopsony restraints that would be per se unlawful in any context.”[109]
This Essay submits that the NCAA dicta correctly signaled that agreements restricting player compensation could create redeeming virtues, notwithstanding Nick Saban’s unregulated salary.[110] To be sure, the restraints restrict atomistic rivalry for players. But as Standard Oil itself recognized, some agreements that restrict atomistic rivalry have the “legitimate purpose of reasonably forwarding personal interest and developing trade” and are thus not unreasonable.[111] The Court in Sylvania concurred, explaining that some restrictions on “a purely competitive situation” can overcome free riding, correct a market failure, and enhance inter-brand competition.[112] There is no reason to suspend this logic because the restraints govern buying rather than selling.[113]NCAA’s dicta, which addressed the validity of compensation limits, expressly invoked Sylvania, suggesting that such restraints could “enhance market-wide competition.”[114]
Sylvania and NCAA assumed that product differentiation is beneficial. Moreover, the “more accurate economic conceptions” that courts must apply when assessing restraints in “the light of reason” bolster NCAA’s assertion that unbridled rivalry will produce insufficient differentiation.[115] Imagine that schools could include non-students on teams, perhaps providing compensation equal to the cost of attendance.[116] Each team would fully internalize the private benefits of including non-students. These benefits could include, for example, improved winning percentages. But no school would internalize the full impact of such participation upon the nature of the product. If a few schools chose this route, others would predictably follow suit, producing an equilibrium where few, if any, schools fielded teams exclusively populated by students. Only a horizontal agreement preventing rostering non-students would reliably prevent a race to the bottom that would transform college football into a football team owned by a college but full of non-students.
The agreement just described is as “pernicious” under NPR as one restricting player compensation.[117] Both restrict rivalry for inputs. But plaintiffs have properly declined to challenge such restrictions.[118] This concession reflects recognition that unbridled rivalry over the composition of rosters would produce a market failure manifesting itself in negative differentiation of the NCAA’s product, reduced inter-brand competition, and decreased consumer welfare.[119] Translated into the NPR standard and ancillary restraints test, such restrictions can produce redeeming virtues and enhance the efficiency of an otherwise valid venture.
Defendants’ bid for a stronger exemption regarding compensation restrictions rests upon a similar claim. Unbridled compensation rivalry, they say, will result in an additional market failure, also undermining the quality of the NCAA’s product and reducing demand.[120] Indeed, plaintiffs have asserted that the challenged restraints reduce student-athlete compensation compared to what unfettered rivalry will produce.[121] Such limits on compensation rivalry reinforce the requirement that participants be students. If schools could pay whatever the market would bear, the supply of non-student labor would increase significantly, in both numbers and quality, thus increasing schools’ temptation to include non-student participants and undermining the “student-only” policy.
The defendants, district court, and Ninth Circuit agree that the propensity of a restraint to prevent unbridled compensation rivalry helps differentiate collegiate from professional sports, improving consumer welfare.[122] They only disagree as to the magnitude of benefits and as to whether the restrictions are broader than necessary.[123] Thus, both lower courts agreed that restrictions on compensation unrelated to education—that is, restrictions that prevent the payment of an outright salary—are procompetitive, even though such restrictions extinguish the very rivalry that would produce the largest increase in student-athlete compensation.[124] Indeed, one implication of Alston’s result is that a less restrictive means of achieving the objective would entail voluntary integration, independent of any exercise of market power.[125] No one has articulated a similar account of how limiting coaching staffs to students, for instance, or limiting coaches’ salaries to the cost of attendance, would distinguish the quality of the product that schools offer to paying fans in a manner that would appeal to consumers.[126]
However, a conclusion that compensation restraints may produce redeeming virtues is simply a necessary condition for application of the player eligibility exemption. Proponents must also explain why this stronger exemption is superior to Rule of Reason scrutiny. Hopefully, the Court will reject this proposed new exemption, at least for now. As explained in Subpart V.C of this Essay, the basis for the original Quick Look, on which American Needle’s dicta tried to build, was questionable at best.[127]
Therefore, the pro-plaintiff Quick Look has very little to recommend it and is surely no model for further doctrinal evolution that completely shields some concerted action from Sherman Act scrutiny. NCAA’s apparent endorsement of “a great majority of such restrictions” was dicta and rested in part upon a concession by plaintiffs—the University of Georgia and the University of Oklahoma—with strong economic interests to preserve such restrictions.[128] Even on their own terms, these dicta conceded that some such restrictions did not enhance competition, thereby implying that courts should assess such restraints under the Rule of Reason to separate the wheat from the chaff.
Proponents of narrowing the scope of per se rules in favor of full-blown Rule of Reason analysis in other contexts have persuasively explained that such fact-intensive scrutiny can generate information about the actual impact of restraints previously condemned, thereby informing future assessment regarding whether something other than full-blown analysis is appropriate.[129] Such scrutiny can also help parties, courts, and scholars hone their theoretical conceptions regarding how to think about the impact of such restraints and what questions a tribunal should ask when examining them. By analogy, the exemption sought by the defendants would prevent the generation of information about the impact of exempted agreements that decisions such as O’Bannon and Alston have themselves produced, information that scholars and practitioners alike can employ to assess their true economic effect. Perhaps such assessments would confirm defendants’ assumption regarding the uniformly procompetitive nature of such agreements, but perhaps not.
Of course, at least in the short run, a full-blown Rule of Reason assessment will consume more resources than the defendants’ new exemption. But this would be true of any exemption from ordinary full-blown analysis. Moreover, this putative benefit is partly illusory. Once parties understand that inclusion in a particular category will obviate Rule of Reason scrutiny, defendants will predictably invest resources attempting to convince courts that restraints in fact fall into this category, while plaintiffs will invest resources to prove the opposite.[130] These additional litigation-related investments will partly offset the savings from eliminating full-blown scrutiny. Finally, as noted earlier, the prospect of complete exemption from any antitrust scrutiny will encourage potential defendants to adopt some eligibility related restraints that are anticompetitive on balance, knowing as they will that such restraints will be immune from antitrust scrutiny.[131]
Assuming the Court does reject the defendant’s bid for a new exemption, it will finally have to wrestle with the problem that consumed the Ninth Circuit—namely, application of the full-blown Rule of Reason to the challenged restraints. Here, NCAA itself strongly bolsters the Ninth Circuit’s approach, which found that plaintiffs had established a prima facie case by showing that, but for the restraints, NCAA members would have provided greater compensation to student-athletes—at least those playing football and basketball.[132] However, as explained in Part V.B of this Essay, this approach seems to contradict the apparent rationale for rejecting per se condemnation of such restraints in the first place.[133] After all, if such restraints do in fact avoid per se condemnation, they do so because they may produce non-technological efficiencies by eliminating or attenuating a market failure.[134] Thus, proof that such restraints reduce player compensation below the level that unbridled rivalry would produce is unremarkable given that such restraints would properly survive per se condemnation in the first place.[135] That is, a conclusion that such proof establishes a prima facie case rests upon an arbitrary choice between two entirely different accounts of the impact of such restraints; one reflecting a harmful exercise of market power and the other reflecting an entirely beneficial example of horizontal voluntary integration, closely analogous to the numerous almost mundane restraints agreed upon by franchisees upon entry into a particular franchise system.[136]
To be sure, the plaintiffs have also convinced the Ninth Circuit that the defendants possess market power—indeed, a monopsony—in a properly defined relevant market, although defendants apparently stipulated this market.[137] Still, even dominant firms enter agreements that overcome market failures and produce benefits.[138] Proof that such a firm has entered a contract does not, without more, logically give rise to a presumption that the agreement produces antitrust harm. This is so even if the restraint produces prices that are higher than those that a non-restraint world would create. Only proof that the challenged restraint reduces output, properly defined, would, as a logical matter, suffice to establish a prima facie case.[139] However, plaintiffs apparently made no attempt to define the proper measure of output in this context or link the imposition of the restraints to any reduction in that measure.
The Court could therefore reverse and remand for additional assessment of whether the plaintiffs have established a prima facie case. The plaintiffs would thus have an opportunity to define the proper measure of output and prove that the restraint reduced output measured in this manner.
In any event, regardless of how the plaintiffs have established a prima facie case, the defendants have in fact satisfied their burden of producing evidence that the challenged restraints produce significant benefits. If the defendants had not discharged this burden, there would have been no need for the plaintiffs to adduce evidence of a less restrictive alternative that supposedly produces identical benefits. Moreover, as explained earlier, proof of such benefits further undermines any presumption that a restraint produces anticompetitive harm, in this case, by establishing that the agreement overcomes a market failure.[140] As a result, there is no rationale for calculating the magnitude of these benefits or comparing such benefits to presumed harms—because there is no longer any reason to presume that such harms exist. Indeed, proof that the restraint in fact overcomes a market failure both negates any presumption of harm and establishes that the restraint produces benefits, thus requiring a conclusion that the practice unambiguously improves welfare.
Proponents of the lower court’s decision may respond that courts should nonetheless assess whether there is a less restrictive means of achieving the same benefits as the challenged restraints. Proof that such an alternative exists, they might say, suggests that the defendants have adopted the restraint mainly or just partly to exercise market power. But any such argument begins with the assumption that the restraints are restrictive to begin with. Absent evidence that the restraints have reduced output, proof that they in fact overcome a market failure that would have manifested as lower pre-restraint prices undermines any presumption that such restraints are restrictive in the first place.
* Ball Professor of Law and Co-Director, Center for the Study of Law and Markets, William & Mary Law School. The author thanks the editors of the Wake Forest Law Review, both print and online editions, for their thoughtful edits and diligent efforts.
[1]. 468 U.S. 85 (1984).
[2]. Infra Part III.
[3]. Id.
[4]. See Alan J. Meese, Requiem for a Lightweight: How NCAA Continues to Distort Antitrust Doctrine, 56 Wake Forest L. Rev. (forthcoming Dec. 2021).
[11]. Id. at 52 (listing three “evils which led to the public outcry against monopolies”).
[12]. Cont’l T.V. v. GTE Sylvania, Inc., 433 U.S. 36, 49 n.15 (1977).
[13]. See generally N. Pac. Ry. Co. v. United States (“NPR“), 356 U.S. 1 (1958).
[14]. Id. at 5.
[15]. Id.; see alsoSylvania, 433 U.S. at 50 (quoting NPR with approval).
[16]. Alan J. Meese, Price Theory, Competition, and the Rule of Reason, 2003 U. Ill. L. Rev. 77, 94–95 (2003) (recognizing that the Court defines “anticompetitive” broadly).
[17]. Id. at 94 (explaining that the Court has “equated the term [‘competition’] with ‘rivalry’ for the purpose of per se analysis, with the result that any coordination of previously independent activity is anticompetitive”).
[18]. Id. at 95.
[19]. Id. at 96.
[20]. See id. at 96–98.
[21]. See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division II, 75 Yale L. J. 373, 383 (1966) (distinguishing between antitrust’s treatment of naked price fixing and “close-knit combinations” such as partnerships on this basis); Richard A. Givens, Affirmative Benefits to Industrial Mergers and Section 7 of the Clayton Act, 36 Ind. L. J. 51, 52–53 (1960) (concluding that “‘lack of any redeeming virtue’ is the chief distinction between those kinds of loose-knit combinations which are held in unreasonable restraint of trade in and of themselves and the close-knit combinations”); Alan J. Meese, In Praise of All or Nothing Dichotomous Categories: Why Antitrust Law Should Reject the Quick Look, 104 Geo. L.J. 835, 849–51 (2016) (explaining the NPR standard’s disparate treatment of naked price fixing and the formation of partnerships).
[22]. Bork, supra note 21, at 383.
[23]. See generally United States v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898) (articulating the ancillary restraints doctrine sixty years before NPR).
[24]. Compare N. Pac. Ry. Co. v. United States (“NPR”), 356 U.S. 1, 5 (stating that “[the] principle of per se unreasonableness . . . makes the type of restraints proscribed by the Sherman Act more certain . . . .”), withAddyston Pipe, 85 F. 271 at 282–83 (illustrating that the “very statement of the rule” implies that the court must determine whether “the contract [at issue is] one in which there is a main purpose, to which the covenant in restraint of trade is merely ancillary”).
[25]. See Arizona v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332, 344 (1982) (explaining that restraints are condemned as unlawful per se “[o]nce experience with a particular kind of restraint enables the Court to predict with confidence that the Rule of Reason will condemn it”).
[26]. See FTC v. Superior Ct. Trial Lawyers Ass’n, 493 U.S. 411, 435 n.18 (1990) (“Very few firms that lack power to affect market prices will be sufficiently foolish to enter into conspiracies to fix prices.”) (quoting R. Bork, The Antitrust Paradox, 269 (1978)); Rothery Storage v. Atlas Van Lines, 792 F.2d 210, 221 (D.C. Cir. 1986) (Bork, J., for the court).
[27]. Areeda, infra note 78, at 21–22.
[28]. See Oliver E. Williamson, Economic Institutions of Capitalism, 7 (1985) (“The prevailing orientation toward economic organization [during this period] was that technological features of firm and market organization were determinative.”); see also Meese, supra note 16, at 124–32 (documenting how the Supreme Court relied upon the applied price theory tradition that Williamson discusses when expanding the scope of the per se rule).
[29]. 433 U.S. 36 (1977).
[30]. Id. at 55 (explaining how non-standard agreements could ensure production of services retailers might not provide “in a purely competitive situation”).
[34]. United States v. Topco Assocs., Inc., 405 U.S. 596, 607–12 (1972).
[35]. Bd. of Regents of the Univ. of Okla., 707 F.2d at 1153–54.
[36]. Id.
[37]. Brief for Respondents at 23, Nat. Collegiate Athletic Ass’n v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984) (No. 83-271), 1984 WL 1036477, *23.
[38]. NCAA, 468 U.S. at 101.
[39]. Id. at 102.
[40]. 958 F.3d 1239 (9th Cir. 2020).
[41]. See, e.g., id. at 1256; O’Bannon v. NCAA, 802 F.3d 1049, 1069–1070 (9th Cir. 2015); Law v. NCAA, 134 F.3d 1010, 1017–1020 (10th Cir. 1998).
[42]. See Herbert Hovenkamp, The NCAA and the Rule of Reason, 52 Rev. Indus. Org. 323, 324–26 (2017) (reading NCAA in this manner); see also Alan J. Meese, Competition and Market Failure in the Antitrust Jurisprudence of Justice Stevens, 74 Fordham L. Rev. 1775, 1791–92 (2006).
[43]. See, e.g., Topco, 405 U.S. at 608–12; see also NCAA, 468 U.S. at 99 & nn.18–19 (citing Topco with approval).
[44]. NCAA, 468 U.S. at 101–02.
[45]. Id. at 103 (“[A] restraint in a limited aspect of a market may actually enhance market-wide competition.”).
[46]. Rothery Storage v. Atlas Van Lines, 792 F.2d 210, 226 (D.C. Cir. 1986); Polk Bros, Inc. v. Forest City Enters., Inc., 776 F.2d 185, 188–89 (7th Cir. 1985).
[47]. See, e.g., O’Bannon, 802 F.3d at 1057.
[48]. See Alan J. Meese, Requiem for a Lightweight: How NCAA Continues to Distort Antitrust Doctrine, 56 Wake Forest L. Rev. (forthcoming Dec. 2021).
[49]. Rothery Storage, 792 F.2d at 224 (“To be ancillary, and hence exempt from the per se rule, an agreement eliminating competition must . . . serve[] to make the main transaction more effective in accomplishing its purpose. Of course, the restraint imposed must be related to the efficiency sought to be achieved.”) (emphasis added).
[50]. See, e.g., In re Brunswick Corp., 94 F.T.C. 1174, 1275 (1979) (Pitofsky, Commissioner), aff’d 657 F. 2d 971 (8th Cir. 1981); see also Polygram Holding v. FTC, 416 F.3d 29 (D.C. Cir. 2004) (holding that a restraint that accompanied an otherwise legitimate venture could produce no cognizable benefits).
[51]. See, e.g., Polygram Holding, 416 F.3d at 38–39.
[52]. See Bork, supra note 21, at 380; see alsoPolk Bros., 776 F.2d at 189 (“A court must ask whether an agreement promoted enterprise and productivity at the time it was adopted. If it arguably did, then the court must apply the Rule of Reason . . . .”) (emphasis added).
[53]. Bork, supra note 21, at 383 (emphasis added).
[54]. Id.
[55]. See Am. Needle, Inc. v. NFL, 560 U.S. 183, 197–200 (2010) (treating conduct of a corporation jointly owned by thirty-two NFL teams as concerted action because agreement joined “independent centers of decision making”); Rothery Storage, 792 F.2d at 214–15 (analogizing challenged restraints to those challenged in Topco and NCAA and concluding that all such restraints were concerted action).
[56]. Bork, supra note 21, at 382–84; id. at 384 (treating non-ancillary restraints as unlawful per se). It should not matter that restraints that accompany a joint venture “are likely to survive the Rule of Reason” in the context of sports leagues. SeeAm. Needle, 560 U.S. at 203. This is equally true with respect to restraints that accompany other joint ventures.
[57]. Professional Engineers, 435 U.S. at 692–93 (explaining that the per se rule and full-blown Rule of Reason scrutiny are “two complimentary categories of Rule of Reason analysis” and that “[i]n either event, the purpose of the analysis is to form a judgment about the competitive significance of the restraint”).
[58]. See Maricopa Cnty. Med. Soc., 457 U.S. at 344.
[59]. See Realcomp II, Ltd. v. FTC, 635 F.3d 815, 827 (6th Cir. 2011) (describing these alternative means of establishing a prima facie case).
[60]. Michael A. Carrier, The Rule of Reason: An Empirical Update for the 21st Century, 16 Geo. Mason L. Rev. 827, 827–29; 837 (2009).
[61]. This impact will also alter the ratio of harmful to beneficial restraints in this category.
[62]. Alston, 958 F.3d at 1256 (invoking and applying Rule of Reason’s three-part framework).
[63]. NCAA opined that the defendants there bore a “heavy burden of establishing an affirmative defense[.]” Nat. Collegiate Athletic Ass’n v. Bd. Of Regents of the Univ. of Okla., 468 U.S. 85, 113 (1984). Such an approach makes sense with respect to explicit price and/or output restraints that apparently cannot produce redeeming virtues. However, lower courts, including Alston, have generalized this language, applying this standard to restraints that would survive per se condemnation under the NPR standard because they may produce redeeming virtues. SeeAlston, 958 F.3d at 1257 (describing the NCAA’s “‘heavy burden’” of “‘competitively justify[ing]’” its undisputed “‘deviation from the operations of a free market’” under the Rule of Reason) (quoting NCAA, 468 U.S. at 113)). There is, however, no warrant for imposing upon defendants more than the traditional burden of production when a restraint properly survives per se condemnation under the NPR standard. See Meese, supra note 16, at 108 n.156 (collecting authorities characterizing defendants’ burden as a burden of production). Thus, exemption of the naked restraints before it from per se condemnation resulted in a misleading and non-generalizable pronouncement regarding this aspect of Rule of Reason analysis.
[64]. The exact nature of this balancing, of course, will depend on the welfare standard that the court selects. See generally Roger D. Blair & D. Daniel Sokol, The Rule of Reason and the Goals of Antitrust: An Economic Approach, 78 Antitrust L.J. 471 (2012).
[65]. Cf. Oliver E. Williamson, Economies as an Antitrust Defense: The Welfare Trade-offs, 58 Amer. Econ. Rev. 18 (1968). See also Law, 134 F.3d at 1017 (holding that, after plaintiffs make out a prima facie case, “[t]he inquiry then shifts to an evaluation of whether the procompetitive virtues of the alleged wrongful conduct justifies the otherwise anticompetitive impacts” (emphasis added)).
[66]. Alan J. Meese, Market Failure and Non-Standard Contracting: How the Ghost of Perfect Competition Still Haunts Antitrust, 1 J. Comp. L. & Econ. 21 (2005).
[67]. See, e.g., Leegin Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 878, 882–85, 889–90, 893, 896–98 (2007) (holding that higher retail prices resulting from additional promotion are not antitrust harm).
[68]. Meese, supra note 16, at 100–01.
[69]. See Oliver E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 Amer. Econ. Rev. 18 (1968).
[70]. See Thomas G. Krattenmaker & Steven Salop, Anticompetitive Exclusion: Raising Rivals’ Costs to Achieve Power Over Price, 96 Yale L. J. 209, 278, 278 nn.216–17 (1986) (explaining that courts often treat proof of efficiencies as reason to scrutinize more carefully claims that the restraint produced harms in the first place).
[71]. See Meese, supra note 16, at 163–65.
[72]. SeeNCAA, 468 U.S. at 107–08.
[73]. See id. at 104–108. While the Court also claimed that the restraints had reduced output, it made no effort to adjust that reduction for the quality of the remaining games. Id.
[74]. Brief for Petitioner at 33–34, NCAA, 468 U.S. 85 (1984) (No. 83-271).
[75]. SeeNCAA, 468 U.S. at 111–113; see also id. at 115, 115 n.55 (resting the rejection of one of the defendants’ justifications on finding that the defendants possessed market power).
[76]. 435 U.S. 679 (1978).
[77]. NCAA, 468 U.S. at 109 (quoting Professional Engineers, 435 U.S. at 692).
[78]. Seeid. at 109 n.39 (quoting Phillip Areeda, The “Rule of Reason” in Antitrust Analysis: General Issues 37–38 (Federal Judicial Center, June 1981) (parenthetical omitted), https://www.fjc.gov/sites/default/files/2012/Antitrust.pdf (last visited June 9, 2021).
[79]. See Meese, supra note 42, at 1780, 1789–91, 1800 (reading Professional Engineers in this manner).
[80]. Id. at 1801–02.
[81]. See, e.g., Polygram Holding v. FTC, 416 F.3d 29, 32–33, 36–37 (D.C. Cir. 2005) (detailing and applying this approach).
[82]. See Meese, supra note 21, at 873.
[83]. See, e.g., Polygram, 416 F.3d at 35 (detailing this approach).
[84]. Transcript of Oral Argument at 42, NCAA v. Alston, No. 20-512 (Mar. 31, 2021).
[85]. See Andrew I. Gavil, Moving Beyond Caricature and Characterization: The Modern Rule of Reason in Practice, 85 S. Cal. L. Rev. 733, 777–81 (2012) (endorsing application of the Quick Look to restraints regardless of how they avoid per se condemnation); Meese, supra note 21, at 866 n.165 (collecting numerous decisions asking whether numerous restraints, including exclusive dealing contracts, are “inherently suspect”).
[86]. See Meese, supra note 21, at 864–65 (describing plaintiffs’ strong incentives to convince tribunals that challenged restraints are “inherently suspect” so as to avoid almost certain failure to establish a prima facie case under standard Rule of Reason analysis); id. at 863 (explaining that the first step in Rule of Reason analysis is to ask whether a restraint is inherently suspect).
[87]. Id. at 866 n.165 (collecting numerous decisions evaluating and (nearly) always rejecting plaintiff’s claim that restraint was “inherently suspect”).
[88]. Seeid. at 876–80.
[89]. See Alan J. Meese, The Rule of Reason’s Prima Facie Case: Did Harvard Get it Right?, 168 U. Penn. L. Rev. Online (2021) (forthcoming).
[90]. See Meese, supra note 21, at 856 & n.104 (explaining why this language was dicta).
[91]. See Areeda, supra note 78, at 37–38.
[92]. Seesupra note 89 and accompanying text.
[93]. See Cal. Dental Ass’n v. FTC, 526 U.S. 756, 770 (1999).
[94]. See Meese, supra note 21, at 856 & n.104 (explaining that Supreme Court decisions endorsing or implying a Quick Look approach are dicta); see also, e.g., Cal. Dental Ass’n, 526 U.S. at 770–81 (rejecting application of the Quick Look to the case before it).
[95]. Seegenerally Neal Devins & Alan J. Meese, Judicial Review and Nongeneralizable Cases, 32 Fla. State L. Rev. 323 (2005) (contending that precedents adopted in cases with idiosyncratic facts may not reflect appropriate consideration of factors that should inform the resulting rule).
[96]. See Deppe v. NCAA, 893 F.3d 498, 501, 503 (7th Cir. 2018); Agnew v. NCAA, 683 F.3d 328, 342–43 (7th Cir. 2012). But see O’Bannon v. NCAA, 802 F.3d 1049, 1063–64 (9th Cir. 2015) (rejecting this approach and assessing restrictions under the Rule of Reason).
[97]. 560 U.S. 183 (2010).
[98]. Id. at 203; see also Agnew, 683 F.3d at 341 (quoting Am. Needle, 560 U.S. at 203).
[99]. Petition for Writ of Certiorari, at 19–20, 24–25, Nat. Collegiate Athletic Ass’n v. Alston, No. 20-512 (Oct. 2020) (invoking Agnew and Deppe); see also Transcript, supra note 84, at 7 (NCAA disclaiming reliance on the term Quick Look). Of course, the NCAA is seeking more than what the Quick Look provides plaintiffs.
[100]. See Deppe, 893 F.3d at 501–502 (holding that courts should dismiss challenges to such restraints on the pleadings without opportunity for rebuttal); Agnew, 683 F. 3d at 343, n.6 (same); see also Michael H. v. Gerald D., 491 U.S. 110, 119 (1989) (plurality opinion) (explaining that an irrebuttable presumption is really a substantive rule).
[101]. Seeinfra notes 122–28 and accompanying text.
[102]. Transcript, supra note 84, at 33.
[103]. Cf. Meese, supra note 21, at 873 (describing assertions by proponents of the “Quick Look” Rule of Reason analysis that this approach could soften an over-inclusive per se rule).
[104]. See id. at 873–74 (explaining how more selective application of the per se rule eliminated any putative need for “safety valve” function of the Quick Look).
[105]. See Brief for Petitioner at 9–11, 18–21, Nat. Collegiate Athletic Ass’n v. Alston, No. 20-512 (Mar. 31, 2021).
[106]. Of course, under a straightforward application of the NPR standard or ancillary restraints doctrine, courts would have asked and answered this question earlier in the process of assessing these restraints.
[107]. See Transcript, supra note 84, at 10 (Thomas, J., asking question).
[108]. Seegenerally Law v. Nat’l Collegiate Athletics Ass’n, 134 F. 3d 1010 (10th Cir. 1998).
[109]. Transcript, supra note 84, at 42.
[110]. See generally Nat’l Collegiate Athletics Ass’n v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984).
[111]. Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 58 (1911).
[112]. Cont‘l T.V. v. GTE Sylvania, Inc., 433 U.S. 36, 55 (1977).
[113]. Id. at 54.
[114]. NCAA, 468 U.S. at 103.
[115]. Standard Oil, 221 U.S. at 55, 63.
[116]. The analysis propounded by this paragraph does not depend upon the provision of such compensation.
[117]. Seesupra notes 13–18 and accompanying text.
[118]. Transcript, supra note 84, at 50–51 (“[O]f course, we’re not challenging any restrictions or rules regarding that they be students.”).
[119]. Id. at 50 (articulating the plaintiffs’ contention that the main distinction between professional and collegiate athletics is that the latter is exclusively comprised of students).
[120]. See In re Nat’l Collegiate Athletic Ass’n Athletic Grant-in-Aid Cap Antitrust Litig. (“Alston”), 958 F.3d 1239, 1248–50, 1257–58, 1260, 1268 (9th Cir. 2020).
[121]. See id. at 1256–57 (describing the district court’s finding that elite student-athletes are “forced to accept . . . whatever compensation is offered to them”). If this is truly the case, then one might ask why the NCAA does not replicate the approach taken by the Ivy League, that is, ban members from providing any athletic financial aid. See Prospective Athlete Information, The Ivy League, https://ivyleague.com/sports/2017/7/28/information-psa-index.aspx (last visited June 9, 2021).
[122]. See, e.g., Alston, 958 F.3d at 1246–47, 1256–57, 1260.
[123]. Seeid. at 1254, 1257 (“The NCAA does, however, quarrel with the district court’s analysis at the Rule of Reason’s second step[.]”).
[124]. Seeid. at 1254–55, 1258 (“Not paying student-athletes ‘unlimited payments unrelated to education, akin to salaries seen in professional sports leagues’ is what makes them ‘amateurs.’” (quoting In re Nat’l Collegiate Athletic Ass’n Athletic Grant-in-Aid Cap Antitrust Litig. (“Alston”), 375 F. Supp. 3d 1058, 1083 (N.D. Cal. 2019))).
[125]. The Ivy League, which provides no athletic scholarships, provides an example of such horizontal voluntary integration that would be difficult to attribute to market power. Indeed, the Ninth Circuit in Alston apparently assumed that individual conferences could, without market power, impose restraints identical to those the court invalidated. SeeAlston, 958 F.3d at 1256–57; see also Rothery Storage v. Atlas Van Lines, 792 F.2d 210, 221 (D.C. Cir. 1986) (stating that absence of market power established that defendants adopted challenged practice to “make the conduct of their business more effective”); Broad. Music, Inc. v. Columbia Broad. Sys., 441 U.S. 1, 22 & n.39 (1979) (highlighting the fact that firms without market power had adopted a practice similar to challenged restraint, thereby suggesting that the practice might be reasonable).
[126]. Cf. Law v. Nat’l Collegiate Athletic Ass’n, 134 F. 3d 1010, 1021–24 (10th Cir. 1998) (describing and rejecting different purported redeeming virtues that supposedly justified limits on the salaries of so-called “restricted earnings coaches”).
[127]. Seesupra Subpart V.D.
[128]. Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 103 (1984) (“Respondents concede that the great majority of the NCAA’s regulations enhance competition among member institutions.”).
[129]. See, e.g., Alan J. Meese, Farewell to the Quick Look: Redefining the Scope and Content of the Rule of Reason, 68 Antitrust L. J. 461, 488–89 & nn.113–14 (2000); see also Cal. Dental Ass’n v. FTC, 526 U.S. 756, 781 (1999) (suggesting that courts can ultimately dispense with full-blown Rule of Reason assessment “if rule-of-reason analyses in case after case reach identical conclusions”).
[130]. See Meese, supra note 21, at 863–66.
[131]. Seesupra Subpart V.D.
[132]. SeeNCAA, 468 U.S. at 104–07 (invoking the finding that challenged restraints resulted in higher prices and reduced output compared to a non-restraint baseline to establish prima facie case).
[133]. Seesupra text accompanying notes 62–71.
[134]. Seesupra notes 66–68 and accompanying text.
[135]. See Meese, supra note 16, at 149–52.
[136]. Id.; see also Alan J. Meese, Intrabrand Restraints and the Theory of the Firm, 83 N.C. L. Rev. 5, 69 & nn.312–14 (2004) (collecting authorities demonstrating that franchising contracts are horizontal).
[137]. See In re. Nat’l Collegiate Athletic Ass’n Athletic Grant-in-Aid Cap Antitrust Litig. (“Alston”), 958 F.3d 1239, 1248, 1270 (9th Cir. 2020) (reporting that district court adopted this market definition at “the parties’ request”), cert granted sub nom. Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 1231 (2020) (mem.).
[138]. See Alan J. Meese, Monopolization, Exclusion, and the Theory of the Firm, 89 Minn. L. Rev. 743, 845 (2005) (explaining that some “exclusionary agreements can overcome market failures” and result in “significant cognizable benefits”).
[139]. See Hovenkamp, supra note 42, at 324 (“The plaintiff generally makes out a prima facie case by finding an anticompetitive effect, which means either a restraint that tends to reduce output or that excludes a significant firm or firms.”).
The developing nature of the modern fashion industry, including the recent emphasis on sustainable fashion, has created a need for new legal issues to be addressed. As awareness of the waste and environmental harm caused by the fashion industry has come under fire in recent years, many consumers have turned to purchasing designer products from secondhand consignment stores, especially those operating on an online platform. One successful luxury consignment store is The RealReal.[1] The RealReal is a California-based online consignment store for luxury products.[2] The RealReal operates by accepting luxury designer property from potential sellers on a consignment basis.[3] The RealReal then takes the property through an inspection and authentication process before marketing and selling the luxury goods to potential consumers.[4]
While consumers and environmentalists have eagerly embraced luxury consignment, high-end brands, such as the iconic French-brand Chanel, have taken issue with the new market.[5] Chanel is a fashion brand now based in New York, New York.[6] The brand is known for their double “CC” monogram and other widely known trademarks that are easily recognizable throughout the world.[7] Chanel is a brand that prides itself on luxury and quality and the potential misuse of their famous trademark has raised serious concerns within the company.[8] Chanel has historically exercised an extreme amount of control over the creation, marketing, and distribution of its products.[9] Therefore, Chanel has raised legal concerns over The RealReal’s guarantee that every item advertised to consumers on the site is 100% authentic, directly threatening Chanel’s control to protect consumers from low-quality counterfeit products.
In 2018, Chanel alleged that it had uncovered at least seven counterfeit Chanel bags listed on The RealReal’s site.[10] After discovering that TheRealReal was not authenticating Chanel products as advertised, the company filed suit in U.S. District Court for the Southern District of New York alleging trademark counterfeiting and infringement, false advertising, and unfair competition under New York common law.[11] In determining that the claims should be allowed forward, the court relied on the Second Circuit’s rationale in Tiffany v. eBay[12] where the court noted “the law prohibits an advertisement that implies that all of the goods offered on a defendant’s website are genuine when in fact . . . a sizeable proportion of them are not.”[13] While it is still undetermined if the seven unauthenticated bags will satisfy the court’s interpretation of “a sizeable proportion,” the court noted that unlike eBay, The RealReal exercises substantial control over their products by taking physical possession of the items to approve their authenticity.[14] The application of the language comes as a clear warning to secondhand dealers claiming 100% authentic luxury goods. The RealReal and similar online consignment stores receive substantial benefits from taking physical possession of luxury goods and reselling them to consumers. Therefore, the companies assume the additional burden of ensuring that their products satisfy any guarantees made that their products are 100% authentic.[15] The court noted secondhand sellers may bear the potential liability of marketing, selling, and distributing counterfeit goods in the markets they’ve created.[16]
In February 2021, The RealReal was granted permission to amend their initial answer to assert counterclaims based on internal Chanel documents that recently emerged.[17] The RealReal has asserted counterclaims against Chanel alleging antitrust violations specifically “that Chanel has engaged in violations of Section 1 and 2 of the Sherman Act, anticompetitive arrangement in violation of the Donnelly Act, tortious interference with contract, and tortious interference with prospective business relations.”[18] The counterclaims were based on new information that Chanel had previously invested in another secondhand luxury consignment store, Farfetch.[19] The RealReal has alleged that Chanel has violated antitrust laws by attempting to monopolize the secondhand market through strategic investments and litigation. Specifically, The RealReal noted that Chanel has declined to pursue litigation against FarFetch for the same conduct that Chanel alleges is illegal for The RealReal. The RealReal raised these allegations after discovering that Chanel has previously invested in FarFetch and would therefore benefit from FarFetch’s success, and alternately, The RealReal’s failure, in the secondhand market. Additionally, The RealReal alleges Chanel went further in their attempts to monopolize the secondary market by using its dominant reputation to pressure popular stores, such as Neiman Marcus and Saks, to deny The RealReal advertising and retail relationships.
The current legal battle displays the full implications of attempting to integrate sustainability into the world of high fashion. The current legal battle displays the ongoing friction between traditional fashion brands dragging their feet to embrace the adaptations within the modern fashion world, and their desire to protect their consumers and guarantee the quality of their products. Internal memos from Chanel U.S.’s President and Chief Operating Officer adequately capture the company’s struggle to simultaneously “address the threats from the secondhand market while exploring the opportunities it provides.”[20] The final ruling in the current case could send a clear message to the future of sustainable fashion efforts through consignment. Both online consignment stores, as well as fashion giants, need clearer guidelines about how they may control the prestige of their brand while adapting to a secondhand market going forward.
[9] Anna Cabigiosu, An Overview of the Luxury Fashion Industry, in Digitalization in the Luxury Fashion Industry 9, 19 (2020) (“Custom-made products enhance the sense of exclusivity that a luxury product can offer. These attributes must be managed concurrently and require a consistent and coherent approach to create and maintain a luxury fashion brand positioning.”).
[16]Id. (“’By adopting a business model in which [TRR] itself controls a secondary market for trademarked luxury goods, and by curating the products offered through that market and defining the terms on which customers can purchase those products, [TRR] reaps substantial benefit,’ according to Judge Broderick.”).
[20]Id. (“Chanel cites benefits to becoming more involved in the secondary market, including communicating directly with a client who’s purchased through secondhand, potentially capturing client data, which would allow Chanel to establish a relationship with a new client and expose the new client to the Chanel experience.”).
College football is coming back to EA Sports.[1] Daryl Holt, EA Sports vice president and general manager, announced Feb. 2, 2021 that EA Sports will revive its college football video game series.[2] While Holt declined to share any timeline for the arrival of the next installment of the college football series, fans are looking forward to the game’s release, which previously sold millions of copies worldwide.[3] The new game, EA Sports College Football, will be the beloved franchise’s first college football title since EA discontinued the NCAA Football franchise in 2013.[4] EA Sports previously cited an ongoing class-action legal dispute with ex-athletes over using their likeness without compensation as the reason for the cancellation after a class action lawsuit,[5]O’Bannon v. NCAA.[6]
Ed O’Bannon, a former All-American basketball player, was depicted in an EA Sports college basketball video game.[7] Because the NCAA has long held that college athletes are by definition “amateurs” and cannot profit in any way from their status as student-athletes, O’Bannon never consented to the use of his likeness in the video game, and he was not compensated for it.[8] Thus, in 2009, O’Bannon sued the NCAA and the Collegiate Licensing Company, the entity which licenses the trademarks of the NCAA and a number of its member schools for commercial use, in federal court.[9] EA Sports and the Collegiate Licensing Company settled in 2014 for $40 million.[10] Without active licensing agreements, EA Sports had to stop all distribution of its college sports video games.[11] This time, however, EA Sports stated the new game would not include names, images, or likeness (“NIL”) of any student-athletes.[12] By using generic players, EA Sports hopes to sidestep the hot-button issue of NIL rights and compensation.[13] However, with a new Supreme Court case on the horizon, EA Sports’ plans could all change.
On March 31, 2021, the Supreme Court will hear arguments for Alston v. NCAA[14] which is an NCAA case on student-athlete compensation.[15] Former and current college athletes argue the NCAA’s rules restricting on education-related benefits, violated antitrust law under the Sherman Act.[16] In Alston, the district court found for the athletes, holding that the NCAA must allow for certain types of academic benefits, such as “computers, science equipment, musical instruments and other tangible items not included in the cost of attendance calculation but nonetheless related to the pursuit of academic studies.”[17] The U.S. Court of Appeals for the Ninth Circuit affirmed, recognizing the NCAA’s interest in “preserving amateurism,” but concluding that the NCAA’s practices violated antitrust law.[18] Further while the Alston litigation has been ongoing, six states have passed legislation addressing an athlete’s ability to receive compensation for use of their NIL, and more than two dozen other states are considering similar bills.[19]
If the Supreme Court decides that the NCAA’s amateurism rules violate federal antitrust law, this could allow for student-athletes to be compensated by anyone for their NIL. Further, if this decision is upheld, EA Sports’ plan not to use the NIL of existing college players may all change.
Since EA Sports is willing to pay athletes from years ago for use of their NILs, Alston may immediately open the door for current athletes to profit directly from video games.[20] From EA Sports’ perspective, it would be beneficial to integrate real college players in its games. For example, NCAA Football 13 and 14 featured Robert Griffin III and Denard Robinson, respectively.[21] Both players were already in the NFL when their respective video games were released.[22] Thus, EA Sports was willing to put them on the cover of their video game because their time at Baylor and Michigan was “still fresh enough in the collective memory[.]”[23] The connection to real players can allow EA College Sports to go back to its dominance in the college football gaming world.
Overall, the best decision for the Supreme Court may be to reaffirm the Ninth Circuit as a win for college athletes and EA Sports. The Supreme Court could rule that student-athletes may never be paid a salary for playing, but could receive the compensation they deserve through signing autographs, marketing deals and other forms of pay for being a brand.[24] In this model, the NCAA can still benefit because this structure can still follow the NCAA’s amateurism requirement of no “pay for play.” Here, nobody would pay the athlete to play; EA Sports or any other video game is simply paying for their brand and likeness. Therefore, affirming the Ninth Circuit would provide the most benefit to the student-athletes and the gaming community as a whole so that companies like EA Sports can bring back the video games as we know and love them.
Antitrust laws ensure that companies are not artificially impacting or controlling demand for products.[1] Higher education institutions are uniquely situated multibillion-dollar businesses whose product is not simply degrees—but also scholarship, athletics, and the arts.[2] Although these institutions have qualities that differentiate them from traditional businesses, they remain subject to the Sherman Act’s antitrust regulations.[3] Notably, the Sherman Act applies regardless of the institution’s financial structure or funding sources. Educational nonprofit status does not shield Sherman Act coverage and oversight applies whether the institution is for-profit or nonprofit.[4] Additionally, state institutions should be specifically aware that state actor antitrust immunity[5] is often narrowly construed when applied to public institutions of higher education, subjecting both public and private institutions to antitrust regulation.[6] Regardless of the institution’s size, structure, or funding sources, the institution competes with competitors, and is therefore subject to the same regulations as more traditional businesses.
Generally, antitrust violations require a conspiracy, knowingly joined and formed, to affect interstate commerce or restrain competition.[7] The conspiracy or collusive agreement need not be a formal contractual agreement and can arise informally.[8] Enforcement of informal agreements may create tension with higher education’s spirit of collaboration.[9] Often, colleges and universities use their peers to gain insight into “best practices” and share approaches to challenges common to the cohort.[10] While the exchange of approaches and ideas may be an important and accepted practice for like-institutions, under federal antitrust law this action remains the exchange of ideas between competitors.[11] As a result, antitrust lurks unassumingly behind many of the general practices of higher education administration.[12] In antitrust regulation, collaboration among competitors does not raise antitrust concerns unless it restrains competition.[13] In higher education, competition occurs not merely in outputs such as research, athletics, and educational outcomes, but also in inputs through student admissions.
College admissions provide some of the strongest competition in the country. In 2018, Harvard accepted less than 5 percent of its 43,000 applicants.[14] The National Association of College Admissions Counseling reports that selective universities receive over one-third of all college applications yet enroll only 22 percent of freshman students.[15] The level of competition in admissions is palpable,[16] adjudicated,[17] and hoodwinked[18] constantly.
Most recently, a debate about college admissions testing has created a competitive debate.[19] Colleges without testing requirements get more applicants,[20] increasing their pool of admittable students and their potential competitive advantage. Yet, colleges should be aware that a joint decision to remove testing may be considered a removal of competition through improper cooperation between competitors. For example, the agreement between medical schools to participate in a uniform residency admission protocol through the National Resident Matching Program (“NRMP”)[21] required a judicial and codified exception from antitrust regulation to continue operating.[22] The NRMP creates cooperation between competitor medical schools, which raised an antitrust concern and required an exception to continue.[23] This exception was granted based on the NRMP system’s established nature.[24] Creation of an agreement to remove admissions testing, as a new and unestablished agreement, would likely not receive the same deference.[25]
Prior to the pandemic, the movement away from admissions testing was growing.[26] Early removal of testing occurred at less selective institutions; however, more selective universities followed suit in 2018 when the University of Chicago removed testing standards in admissions.[27] Following Chicago’s decision, small and selective institutions such as Bucknell University and DePauw University also made the shift away from testing.[28] The issue reached national publicity, pandemic notwithstanding, in 2020 when the California system chose to remove testing,[29] despite research from their own faculty finding that testing is the best predictor of collegiate success.[30]
The pandemic-induced moratorium on admissions testing requirements is a band-aid to a bullet hole, and the issue remains unresolved beyond the 2022 admissions cycle.[31] While COVID-19 changed admissions protocols through necessity, continued change should be made thoughtfully to avoid subjecting the institution to antitrust issues. Modifying who attends the school, or who competes for positions at the school, if done collusively will implicate antitrust concerns.[32] Instructive caution comes from the Department of Justice’s recent decision not to bring charges against eight D.C.-area prep schools. In 2018 eight prep schools jointly announced a curriculum transition away from providing Advanced Placement (“AP”) courses.[33] After extensive investigation, the Department of Justice dropped charges in January 2021 out of respect for the heavy burden on schools as a result of the pandemic. This decision was despite evidence of an agreement between the schools to modify their curricula.[34] Relief was granted due to extenuating circumstances; however, relief is situational, and this investigation offers helpful guidance.
The competitive landscape between the prep schools would have shifted if only a few schools had eliminated AP courses. Offering AP courses can affect applicant interest, which subsequently impacts tuition dollars and financial competition. The same is true for removal of college admissions testing. Colleges choosing to forego testing requirements receive more applications,[35] increasing their pool of admittable students and their potential competitive advantage. Logically, competition between collegiate institutions will exist without test scores, just like competition between the prep schools would exist without AP courses.[36] The concern here is the existence of an agreement between competitors to implement the change, which would constitute impermissible cooperation.
Collusive action need not be malicious.[37] Defending collusive action that controls or modifies the competitive landscape with assertions of corrective or good intent may not be enough. Again, the Department of Justice’s investigation into the D.C. prep schools is instructive. The prep schools framed their curriculum decision as a response to the “diminished utility of AP courses,” stating the goal of the AP program is not its modern reality.[38] Similarly, collegiate institutions removing testing requirements cite that standardized testing has not fulfilled its original intent of diversifying the Ivy League.[39] This lack of fulfillment assertion comports with recognition among some schools, advocates, and scholars that standardized testing favors wealthy and non-minority students who can afford test prep and multiple test attempts.[40] However, antitrust does not distinguish between selfish or social welfare motives: collusive action cuts both ways.[41] Collusive removal of competition, regardless of a socially beneficial intent, is a modification of competition between schools. If admissions testing modification happens in concert with peers, colleges may be subject to antitrust investigations.
This is not to say testing should not be removed, simply that colleges should be careful to make changes after concerted internal deliberation. The California system’s new admissions policy is the decision of one system with one overarching President and Board of Regents.[42] This action is not a decision impacting competition because this decision is within a system, not between systems. While other states also have state-wide public higher education systems,[43] this is not always the case. A state with separately operating state institutions, each with unique governance structures, could be subject to antitrust investigation if it colluded with outside institutions on a decision impacting competition, such as removal of admissions testing. Impermissible external deliberation can occur within and between states and remains collusive whether the institutions are public or private.[44]
While communication on “best practices” is considered commonplace in higher education administration,[45] administrators should keep deliberation internal when developing a strategy for accepting or not accepting testing in college admissions.[46] Relief granted to educational institutions in light of COVID-19[47] will not last indefinitely. Social aims are not exempt from antitrust if they have an anticompetitive result,[48] and collusion to remove test score quantifiers in the application process could, because of its impact on competition, place schools at risk. Institutions exploring the removal of testing from admissions requirements should proceed with caution.
[22] Jung v. Ass’n of Am. Med. Coll., 339 F. Supp. 2d 26, 46 (D.D.C. 2004) (dismissing a previous finding that plaintiffs of an antitrust class action adequately alleged the existence of a collusive agreement to restrain competition in recruitment for medical residency interns through use of the National Resident Matching Program after promulgation of 15 U.S.C. § 37b). Jung and the class alleged the National Resident Matching Program , as the only avenue for placement in medical residency programs, constituted a collusive action restraining competition under the Sherman Act. Jung v. Ass’n of Am. Med. Coll., 300 F. Supp. 2d 119, 125 (D.D.C. 2004). Following the initial motion practice in February 2004 and the prior to further motion practice in August 2004, President Bush signed the Pension Funding Equity Act of 2004. Pub. L. No. 108-218, 118 Stat. 596. The Act contained a specific antitrust exception for medical schools due to the NRMP’s established nature. 15 U.S.C. § 37b(a)(1)(A).
[30]Id. (comparing test scores to high school grades). This research study itself, however, contradicts a Georgetown University report finding that based on test scores alone, only 53 percent of students at the 200 most selective schools would have been admitted. Mack DeGeurin, 27 Great Schools That Don’t Require SAT or ACT Scores, Bus. Insider (July 2, 2019 4:09 p.m.), https://www.insider.com/27-great-schools-that-dont-require-sat-or-act-scores-2019-7.
[37] Jung v. Ass’n of Am. Med. Coll., 339 F. Supp. 2d 26, 37 (D.D.C. 2004) (“If lawful acts are used as the means to effectuate an antitrust conspiracy, the conspiracy itself is still unlawful.”).
[41] Bloom, supra note 13. “For better or worse, folks in the educational field think that what they do is so important on a societal level that they’re exceptional, and that the ordinary rules just shouldn’t apply to them . . . and none of that’s true.” Basken, supra note 10.
[46] Jung v. Ass’n of Am. Med. Coll., 339 F. Supp. 2d 26, 37 (D.D.C. 2004) (“If lawful acts are used as the means to effectuate an antitrust conspiracy, the conspiracy itself is still unlawful.”); see also Lane et al., supra note 3; O’Brien & Cummins, supra note 5.
On October 29, 2019, the National Collegiate Athletic Association (the “NCAA”) announced that it would begin the process of directing its divisions to consider amendments to their bylaws to allow collegiate athletes to benefit from their names, images, and likenesses.[1] In this announcement, the NCAA stated these changes would come in a manner “consistent with the collegiate model.”[2] The NCAA’s decision follows California’s enactment of Senate Bill 206, commonly known as the “Fair Pay to Play Act” (the Act), which (upon its effective date of January 2023) will allow players to profit from their names, images, and likenesses, as well as sign agents to represent them in licensing contracts.[3] Additionally, Congress and other state legislatures are considering proposed legislation that would have similar effects as the Act.[4] However, the NCAA’s language of “consistent with the collegiate model” has an eerie similarity to the argument for restriction on amateurism that it made in O’Bannon v. Nat’l Collegiate Athletic Ass’n when it argued that compensation for college athletes goes against the “identity of college sports.”[5] In comparison to the Act, how much can the NCAA limit the athletes’ ability to profit of their name, image, and likeness?
This post addresses the extent of the legal limitations under the Sherman Antitrust Act on the NCAA when implementing these changes “consistent with the collegiate model.” It analyzes these two procompetitive factors in light of the details of the California Act, and whether the rights granted to athletes under this bill hinder these purposes to the extent that the Rule of Reason allows the NCAA to structure its own likeness compensation rules more narrowly than the Act under the Sherman Antitrust Act.
The Act allows athletes to hire
agents to represent them in contracts with third parties to use the athletes’
likenesses in different ways, as well as allow the third parties to compensate
the athletes in turn.[6]
However, the Act restricts schools from compensating the players when they use
the athletes’ likenesses themselves.[7]
Additionally, athletes cannot enter into contracts if those contracts conflict
with the terms of contracts entered into by the teams for which they play.[8]
To this point, the prospect of amateurism as a procompetitive factor in college sports has allowed the NCAA to refuse cash compensation for name, image, and likeness under the Sherman Antitrust Act, as evidenced by O’Bannon.[9] In O’Bannon, the Ninth Circuit Court of Appeals noted that the NCAA’s rules on player compensation are subject to the Sherman Antitrust Act and should receive the scrutiny classified as the “Rule of Reason.”[10] In the Rule of Reason analysis, the court addresses whether a restriction on trade is procompetitive, and if it is procompetitive, whether there is another way to promote the goal of the restriction in a less restrictive way.[11] In the O’Bannon case, the court found that the NCAA’s restriction on cash payments from schools to athletes for their name, image, or likeness beyond grants for educational expenses of the athlete failed the Rule of Reason analysis.[12] In its reasoning, the court noted the restriction promoted two procompetitive purposes: “preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism” and “integrating academics and athletics.”[13] The court held that third parties, specifically EA Sports, which for years had made video games based on college athletics, could not use the athletes’ likeness without compensating them.[14]
In the court’s reasoning, however, the court mainly addressed the procompetitive factor of “preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism” and did not really address the issue of “integrating academics and athletics.”[15] The court failed to address the fact that the NCAA already has in place certain eligibility requirements that require athletes to take certain kinds of classes during their tenure in school, as well as a GPA requirement that all athletes have to meet.[16] Whether or not players are compensated appears to have no bearing on the athletes’ integration into their college’s academics in any way. Where students are required to still maintain a certain level of academic achievement, an allowance for compensation would be a less restrictive alternative to restricting compensation for athletes while still maintaining the procompetitive factor of integrating athletics to academics. Therefore, allowing compensation for athletes would pass the Rule of Reason under the third prong. So, the only procompetitive factor that could be restricted would be restricting the popularity of the NCAA’s product.
When analyzing the restriction on the popularity of the NCAA’s product, the court in O’Bannon only focused on recruitment of players and payments to the players by the colleges themselves.[17] As noted above, the court held that colleges could not compensate athletes for their likenesses because it would hinder the popularity of the NCAA’s product.[18] Similar to this holding, the Act prohibited the ability of schools to pay their athletes for their likenesses.[19] So, that requirement would actually be consistent with O’Bannon. Looking at the allowance for athletes to hire agents, there is no reason why this would restrict the popularity of the sport. Applying the Rule of Reason analysis, allowing players to hire agents would not be more restrictive on the popularity of the NCAA’s product than would allowing players to earn compensation from third parties. If mandating that third parties must pay collegiate athletes for their likeness is not restrictive on this procompetitive aspect by O’Bannon, certainly allowing the athletes to hire agents to ensure they are fairly represented in a contract would meet the same standard under the Rule of Reason. So, naturally, allowing the athletes to hire agents would pass the Rule of Reason analysis and the NCAA would not be able to prevent students from being able to hire agents.
Additionally, if the court already held in O’Bannon that third parties are required to compensate the athletes[20], the requirement in the Fair Pay to Play Act that prevents the NCAA from implementing a rule prohibiting the athletes’ ability to profit off of their likeness is consistent with the holding in O’Bannon. Therefore, it appears that the allowances for athletes in the Fair Pay to Play Act are consistent with the court’s holding in O’Bannon.
In conclusion, it appears that the
Fair Pay to Play Act’s grant of rights to athletes are consistent with the
holding in O’Bannon, and any restriction beyond the Fair Pay to Play Act
by the NCAA would be inconsistent with the ruling in O’Bannon.
On February 4, 2016, the Fourth Circuit issued its published opinion in It’s My Party, Inc. v. Live Nation, Inc., a civil case concerning state and federal antitrust law. In this case, It’s My Party, Inc. (“IMP”) contended that Live Nation, Inc. (“LN”) violated the Sherman Antitrust Act as well as equivalent Maryland state antitrust law by engaging in monopolization, tying arrangements, and exclusive dealings in the music concert industry. The district court granted summary judgment in favor of LN. The Fourth Circuit affirmed, finding that IMP’s market definitions were defective and that IMP failed to provide any evidence of anticompetitive tying; thus, LN’s practices reflected successful competition, not violations of federal or state antitrust law.
Facts & Procedural History
LN and IMP are competitors in the music industry. LN is a national player that provides concert promoting services to artists throughout the country. IMP is a regional player that provides services in the Washington, D.C. and Baltimore, MD area. Additionally, both operate outdoor amphitheaters: IMP operates Merriweather Post Pavilion in Columbia, MD; LN operates Nissan Pavilion (now called Jiffy Lube Live) in Bristow, Virginia. Merriweather’s seating capacity is roughly 19,000; Nissan’s is roughly 25,000. Concert venues in the Washington-Baltimore range in seating capacity from 1,000 small clubs to 60,000 sports stadiums.
LN and IMP operate in the music concert industry, competing for the business of artists, vying to promote their concerts and showcase them in their venues. Promoters work on financing concerts, scheduling dates and venues, and advertising. Generally, artists have two main options for organizing concert tours. First, artists can contract “locally” by using a different local promoter for each location, securing venues through each promoter. Artists who contract “locally” are typically compensated by a percentage of the gross ticket sales from each concert. Alternatively, artists can contract “nationally” by working with a national promoter (such as LN) for most of all of the tour. Artists who contract “nationally” are typically compensated by receiving a minimum guaranteed payment from the promoter based on the number of shows organized by the promoter.
IMP sued LN, contending that LN foreclosed competition in the concert promotion and venue markets, thereby violating §§ 1 and 2 of the Sherman Act and parallel Maryland antitrust law. Specifically, IMP alleged that LN engaged in monopolization, tying arrangements, and exclusive dealings. The district court found insufficient evidence of any such practices and granted summary judgment on both the federal and state law claims. IMP appealed.
Threshold Question: Identification of the Relevant Market
As a threshold issue in monopolization claims under the Sherman Act, Plaintiffs must define the relevant competitive market. Absent a plausible market definition, courts are hard pressed to find an anticompetitive injury. The relevant geographic market in antitrust cases is defined by the “area within which the defendant’s customers can practicably turn to alternative supplies if the defendant were to raise its prices.”
Here, the Court noted that there are two separate but related markets: (1) the market for concert promotion and (2) the market for concert venues. The consumers in both are the performing artists, who contract with promoters and venues while on tour.
(1) Concert Promotion Market. For the claims of monopolization and tying in the promotion market, the Court noted that the relevant inquiry focused on the area within which artists can find alternative promoters if any one promoter were to increase its prices. Because the demand for concerts is local, the actual concert promotion is also local, even if the promoter is national. While IMP attempted to define the promotion market as national, the Court rejected this definition, instead holding that the market for concert promotion is local; thus, the relevant competition is between LN and IMP in the Washington-Baltimore area.
(2) Concert Venue Market. To define the relevant market for the claims of venue monopolization and tying, the market of the product—here, amphitheaters—is that in which it is “reasonably interchangeable” with other products or the extent to which consumers will change their consumption of one product in response to a price change in another. This is known as the “cross-elasticity of demand.” IMP attempted to confine the market to “major amphitheaters” that have a capacity of 8,000 or more and be in use only from May to September. The only two venues that meet this definition are IMP’s Merriweather and LN’s Nissan. The Court also rejected this definition, finding that IMP presented no evidence that artists will stick with amphitheaters in the event of a price change. Thus, there was an insufficient basis for excluding “reasonably interchangeable” venues such as similarly sized arenas or stadiums from the market definition.
Tying Claims
In addition to IMP’s ill-defined markets, the Court dismantled IMP’s claims of tying. A tying arrangement is a competition suppressant whereby a party agrees to sell one product only if the buyer also agrees to purchase a different (tied) product. The Court noted that the core element in a tying claim is coercion by the seller, forcing the buyer into the purchase of the tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. This is distinguishable from the mere bundling of two products—merely offering two products in a single package, allowing each to enhance the appeal of the other, is not itself coercive.
IMP brought two principal tying claims. First, IMP claimed that artists who hire LN for its promotion services are compelled to perform at its Nissan venue. Second, IMP claimed that LN will give artists access to its amphitheaters in other locations only if they choose Nissan for their Washington-Baltimore date. For these claims, the tying products used to lure artists were promotion services and amphitheaters in other areas, respectively. The tied product for both claims was Nissan.
The Court found no direct evidence that supported either claim. For the venue-to-promotion claim, the Court found that LN never conveyed that an artist could not receive its promotion services unless it appeared at Nissan. In fact, some artists on LN-promoted tours actually chose IMP-owned Merriweather fourteen percent of the time. For the venue-to-venue claim, IMP presented no evidence that LN withheld access to its other amphitheaters unless artists chose Nissan over Merriweather.
Additionally, the Court found no circumstantial evidence to support either claim. To prove coercion circumstantially, the plaintiff must present evidence that tends to exclude the possibility of independent conduct consistent with competition, ruling out alternative market-based explanations for why consumers might prefer to purchase the tied product along with the tying product. Here, the Court found a number of independent reasons that could have led artists to choose Nissan, including artist compensation, artists’ desire for efficiency that accompanied working with the same promoter, and artists’ preference for Nissan over Merriweather as a better venue.
Conclusion & Disposition
Ultimately, the Court held that LN did not engage in any antitrust violations. The consumers Artists were free to take a package deal of promotion and venues, free to purchase those products separately, free to turn down both, and where they in fact exercised all those options to their advantage. Thus, the Fourth Circuit affirmed the district court’s grant of summary judgment in favor of LN.
On September 15, 2015, the Fourth Circuit issued a published opinion in the civil case SD3, LLC v. Black & Decker. SD3, LLC and its subsidiary, SawStop, LLC (together, “SawStop”) sought relief under section 1 of the Sherman Antitrust Act (15 U.S.C. § 1). The Circuit Court quickly affirmed the dismissal of SawStop’s standard-setting claims as well as claims made against several parent and affiliate companies named in the complaint. The court did, however, reverse the district court’s dismissal of SawStop’s group-boycott claim, allowing it to move forward. Judge Agee wrote for the majority, explaining that the district court had applied too high of a standard for the pleading stage as to the group-boycott claim.
Procedural History
The United States District Court for the Eastern District of Virginia dismissed this case because it found that the plaintiff had not plead sufficient facts to support its Sherman Antitrust claims against any of the defendants. SawStop appealed to the Fourth Circuit, which decided the appeal after argument.
SawStop’s Unsuccessful Attempt to Enter the Table-Saw Market
SawStop developed a technology to help limit human injury in table-saw accidents that it called “active injury mitigation technology” or “AIMT.” Shortly thereafter, it sought licensing agreements with a number of table-saw manufacturers. Several manufacturers ran safety and production tests which yielded favorable results. However, the manufacturers had reservations about adopting the product due to product liability issues, engineering, and other costs. Ultimately, SawStop’s attempts to secure a licensing agreement were unsuccessful. SawStop alleges that the table-saw industry engaged in anti-competitive practices together to prevent AIMT from entering the market.
The Sherman Anti-Trust Act Does Not Allow “Guilt by Mere Association”
The Fourth Circuit was quick to affirm the dismissal of the complaint as to several of the corporate parents and subsidiaries mentioned in the complaint. Citing the complete absence of allegations against a number of the defendants, the Fourth Circuit explained, “Antitrust law doesn’t recognize guilt by mere association…” Relying heavily on the precedent from Bell Atlantic Corp. v. Twombly, the court rejected the plaintiff’s claims against a handful of the defendants.
SawStop Adequately Alleged a “Group-Boycott”
As to the group-boycotting claims, the court found that the district court erred in two ways. First, the district court confused the standard for a motion to dismiss with the standard for a motion for summary judgment. Second, the lower court applied too high of a pleading standard against SawStop. The court reiterated that a plaintiff who seeks relief under the first section of the Sherman Antitrust act must plead factual allegations that show an agreement to restrain trade, which is something more than simple parallel activity.
The court held that SawStop had alleged sufficient activity by defendants in part because none of the defendants ultimately licensed SawStop’s product and SawStop had specific factual allegations to support its theory of the case. The plaintiff alleged that the industry made a decision to avoid the new technology for fear of creating product liability issues for non-adapters. The defendants attempted to argue that each actor decided not to pursue an agreement with SawStop at different times and in different ways. Importantly, the court noted that dissimilarities during the beginning stages of an alleged conspiracy are not enough to “render the existence of a conspiracy implausible.” While discussing the important distinction between a “probable” and a “plausible” standard, Judge Agee also expressed caution, “We must be careful not to rely on our own subjective disbelief here, as even the acts that the manufacturers and the dissent say are dissimilar might also be read to suggest deception.”
The majority opinion found that SawStop had not only alleged parallel activity, but also “something more.” SawStop was able to articulate a “detailed story” about just how the group-boycott occurred. The complaint identified specific people, times, and instrumentalities of the group-boycott. The court also found special importance in the complaint’s allegation of motive.
SawStop Failed to Adequately Allege a Standard-Setting Conspiracy
While the court was willing to let SawStop move forward on its group-boycotting claim, it applied its view of the proper pleading standard to the standard-setting claims and found that the complaint did not plausibly establish a conspiracy, but rather only pointed out involvement in lawful standard-setting panels. Even an “incorrect” decision by such a panel does not create a presumption of wrong-doing under section one. If it did, the court argued, “…courts would be cast into the role of standard-setting appellate bodies.”
The case has been remanded to the lower court for proceedings on the group-boycotting claim against the remaining defendants.
