By Alana C. Newhook
Professional sports leagues have a long history when it comes to antitrust law. In 2009, the attempted sale and move of the bankrupt Phoenix Coyotes brought antitrust issues of franchise relocation restrictions back into the limelight. While bankruptcy law drove the case, antitrust claims attacking the validity of the NHL franchise relocation restrictions played an important role. 1
In 1995, the Winnipeg Jets moved to Arizona to form the Phoenix Coyotes. 2 In 2001, Jerry Moyes became the dominant investor and secured a lease contract with the city of Glendale for its new hockey arena. 3 Soon after the Coyotes started playing in Glendale, the franchise fell into financial trouble and the Moyes group started looking for new buyers for the franchise. 4 On May 5th, 2009, the Coyotes’ owners filed for bankruptcy and signed, as the seller, an Asset Purchase Agreement (“APA”) with PSE Sports & Entertainment, L.P., (“PSE”) as the buyer. 5 The APA provided that PSE would pay $212,500,000 in cash, and obtain an order from the bankruptcy court approving the sale. The court order was to provide that the buyer could have home games played in southern Ontario, Canada, regardless of the whether the NHL or its members agreed. 6
In June, the bankruptcy court held that the Coyotes’ franchise could not be sold free and clear of the relocation restrictions enumerated in the Coyotes’ contract with the NHL. 7 In an antitrust suit separate from the bankruptcy proceedings, the Coyotes argued that the NHL franchise relocation restrictions violated Section 1 and that the NHL violated Section 2 of the Sherman Act by unlawfully using the NHL’s market power to prevent the Coyotes from moving to Canada. 8 In the June 2009 bankruptcy hearing, the bankruptcy court held that antitrust law did not serve as applicable nonbankruptcy law to allow the sale of the Coyotes free and clear of the NHL’s interests. The court held that the NHL had the right to admit only new members who satisfied the application requirements, the right to control the location of members’ home territory, and the right to a relocation fee. 8 In reaching this conclusion, the court foreclosed the possibility that PSE/Basillie/Moyes could force the sale and relocation of the Coyotes to Hamilton without the NHL’s consent. 10
I. Antitrust Law Background
Section 1 of the Sherman Act renders “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations” illegal. 11 It further states that “any person who shall make any contract or engage in any combination or conspiracy,” as declared illegal in the previous sentence, may be guilty of a felony. 12 A violation of Section 1 requires three elements: 1) the existence of a contract, combination or conspiracy among two or more separate entities, 2) which unreasonably restrains trade, and 3) affects interstate or foreign commerce. 13 Horizontal restraints of trade arise out of concerted action between competitors. 14 The franchise relocation restrictions imposed by professional sports leagues are horizontal due to the fact that most of the professional leagues’ relocation restrictions require a majority of the club owners’ approval. 15 When viewed as an attempt by franchise owners to control which cities boast professional sports teams, these relocation restrictions resemble an agreement among competitors to divide markets. 16
i. The Special Structure of Sports Leagues
Although governed by Section 1, most professional sports leagues do not fit easily into the established antitrust analytical structures because of their uncommon mixture of competition and cooperation. 17 The individual teams in a sports league “are not completely independent economic competitors, as they depend upon a degree of cooperation for economic survival.” 18 Whether the league and its members are economic competitors or cooperative members of a mutually beneficial joint venture is subject to debate. 19 The special nature of sports leagues played a prominent role in the Supreme Court’s ruling in National Collegiate Athletic Association v. Board of Regents (“Board of Regents”). 20 The Court analyzed the NCAA’s amateur intercollegiate football television plan, which limited the amount of games that individual member-teams could televise under Section 1. 21 The Court found that the agreement between the NCAA members constituted a horizontal restraint because the plan prevented member schools from “competing against each other on the basis of price or kind of television rights that can be offered to broadcasters.” 22 In this instance, the Court recognized that the integrity of the product could only be protected through mutual agreement, the absence of which would negatively affect consumer choice by removing the product from the market. 23 Board of Regents thus demonstrates that if the concerted action is required to produce the product at all, then the rule of reason should apply. 24
ii. Single Entity Argument
Section 1 provides that any combination, conspiracy, or contract to unreasonably restrain trade in interstate or foreign commerce is illegal. 25 Professional sports leagues have frequently argued that they are single entities. If so, Section 1 does not apply to their actions and the leagues can freely restrain competition. 26 American Needle 27 delivered a blow to the professional sports leagues regarding use of the single entity defense. 28 The Supreme Court unanimously reversed a Seventh Circuit finding that Section 1 does not apply to an exclusive licensing agreement between the NFL and a merchandiser. 29 The test was not whether the defendant was a single entity or seemed to constitute a single entity but whether the concerted action joined together separate decisionmakers. 30 The Court’s opinion in American Needle makes it clear that the NFL and by analogy all the other professional sports teams are not a single entities under Section 1. Therefore, league franchise relocation restrictions would be subject to claims under Section 1. 31
II. Analysis of NHL’s Relocation Restrictions Post Dewey Ranch
Antitrust law could possibly render the NHL franchise relocation restrictions unenforceable. The NHL franchise relocation restrictions are not necessarily invalid as a matter of law 32 and the rule of reason 33 is appropriate to determine if the restrictions violate Section 1. Under the rule of reason, the relocation restrictions are arguably anticompetitive because they allow franchise owners to exercise undue control of which teams enter their markets. More specifically, the relocation restrictions are anticompetitive because: (1) they are overly broad and grant too much power to the League and giving specific individual member teams a veto power on franchise location, and (2) they result in markets that do not reflect consumer demand by preventing teams from moving to locations in which there seems to be more consumer support.
(1.) Overly Broad: The Veto Power
Under the current NHL relocation rule, three-fourths of the member teams have to approve a franchise’s move to a new city. 34 The three-fourths rule is satisfied if twenty-three or more teams approve the move through an affirmative vote. Therefore, seven negative votes from seven teams can block relocation. There are four teams in the immediate geographic area surrounding the proposed Coyotes relocation site: Toronto Maple Leafs, Ottawa Senators, Buffalo Sabres, and the Montreal Canadiens. Four other teams in the region include the Pittsburgh Penguins, New York Rangers, New York Islanders, and Philadelphia Flyers. The Buffalo Sabres, Toronto Maple Leafs, and the Ottawa Senators most likely were thinking about the potential loss of gate receipts, fans, and consumer supports in other economic ventures if the Phoenix Coyotes were moved to Hamilton, Ontario. The NHL’s relocation restrictions harm competition and consumers by creating and maintaining an artificial shortage of professional hockey teams. 35 The die-hard hockey fan living in southern Ontario has to watch the Leafs or drive five hours to Ottawa or three hours to Buffalo to watch another NHL team.
This point is as easy as an empty-netter when one considers that the Maple Leafs have not won the Stanley Cup since 1967 yet are consistently at the top of the league in fan attendance. The Maple Leafs is the most valuable NHL franchise and has been for a very long time. The Maple Leafs certainly are illustrative of “by keeping the supply of franchises artificially low, the owners have been able to assure themselves of significant profits irrespective of the quality of their product.” 36 An Ontario hockey fan is harmed by being robbed of the opportunity to choose to watch a team, perhaps even a winning team, in their neighborhood other than the Leafs.
These neighboring teams are concerned about their own financial bottom-line but the consumer demand for another team and the ability of consumers to financially support another NHL team in southern Ontario should be factors in determining the anticompetitive effect of the NHL relocation restrictions. In the Coyotes’ case, it was argued that the relocation restrictions only served to “increase the monopoly power of the Toronto Maple Leafs” whereas, the Coyotes move to the Toronto-Hamilton area would provide “more output, increase aggregate live game attendance, increase television viewership, lower ticket prices, produce more fan-friendly policies, and result in higher-quality hockey.” 37
The NHL’s relocation restrictions do have some precompetitive effects but they are outweighed when balanced against the aforementioned anticompetitive effects. It seems logical that restrictions on franchise movement are reasonable in order to facilitate the cooperation amongst the member teams necessary to support the NHL. Specifically, relocation restrictions prevent teams from moving to new locations last minute or mid-season thereby causing scheduling difficulties. Furthermore, the restrictions arguably allow for the creation and maintenance of conferences with equal amounts of teams ensuring equal amount of opponents and games. However, these administrative ease arguments do not seem important enough to allow for the diminution of competition. The inability of NHL teams to economically thrive suggests that they are not located where hockey fans live. Teams need to be able to move where there is consumer demand. More importantly, the League and its individual members should not be able to stifle competition by relying on relocation restrictions.
Newhook is a third-year law student at the Dedman School of Law at Southern Methodist University.
1 In re Dewey Ranch Hockey, 406 B.R. 30 (Bkrtcy.D.Ariz. 2009).
2 Id. at 33.
3 Id.
4 Id. at 33-4.
5 Id. at 32.
6 Id.
7 In re Dewey Ranch Hockey, 406 B.R. 30 (Bankr. D.Ariz. 2009).
8 414 B.R. 577 (Bankr. D.Ariz. 2009).
9 Id.
10 Id. at 592
11 15 U.S.C. § 1.
12 Id.
13 15 U.S.C. § 1.
14 Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 730 (1988) (“restraints imposed by agreement between competitors have traditionally been denominated as horizontal restraints”).
15 NHL Bylaws §3.3 Admission of new members requires three-fourths of the League members voting in affirmative and §3.5 Transfer of Membership or Ownership Interest in a Member Club requiring three-fourths consent of all members in the League; NFL Constitution Article III, §3.1(B) admission of a new club shall require an affirmative vote of three-fourths of the existing member clubs of the League; MLB Constitution Article V, Sec. 2(b)(1) requiring vote of three-fourths of the Major League clubs for the approval of any expansion by the addition of a new club or contraction by the subtraction of a club or clubs; NBA Constitution Article 9 requiring express consent from all existing NBA member teams.
16 Palmer v. BRG of Georgia, 498 U.S. 46 (1990)(per curiam) (finding market allocation when competitors agreed not to compete in other other’s territory).
17 The uneasy fit of sports leagues in the antitrust law analytical structure is evident by the various scholarly commentaries. Compare Daniel Lazaroff, Antitrust Implications of Franchise Relocation Restrictions in Professional Sports, 53 Fordham L.Rev. 157 (1984) (highlighting the recognition by courts of the difficulty of classifying sports leagues in the traditional economic or legal nomenclature); Thomas A. Piraino, Jr., The Antitrust Rationale for the Expansion of Professional Sports Leagues, 57 OHIO ST. L. J. 1677 (1996); Gary Roberts, Sports Leagues and the Sherman Act: The Use and Abuse of Section 1 to Regulate Restraints on Intraleague Rivalry, 32 UCLA L. REV. 219 (1984) (arguing that the teams comprising sports leagues are not capable of being in economic competition with each other).
18 Brown v. Pro Football, 518 U.S. 231, 248 (1996).
19 See Gary Roberts, note 59, at 231 (arguing that member clubs of a league are not and cannot be natural economic competitors).
20 468 U.S. 85 (1984).
21 Id.
22 Board of Regents, 468 at 99.
23 Id. at 102.
24 NCAA v. Board of Regents, 468 U.S. 85 (1984).
25 15 U.S.C. § 1.
26 Michael A. McCann, American Needle v. NFL: An Opportunity to Reshape Sports Law, 119 YALE L.J. 726, 762-77 (2010).
27 American Needle, Inc. v. Nat’l Football League, 130 S. Ct. 2201 (2010).
28 Id.
29 Id.
30 Id. at 2211-12.
31 See e.g., Brady v. National Football League, 2011 WL 1535240; ChampionsWorld LLC v. U.S. Soccer Federation, Inc., 726 F.Supp.2d 961 (N.D. Ill. 2010); Atwater v. Nat’l Football League Players’ Ass’n, 626 F.3d 1170 (C.A.11 2010).
32 NBA v. SDC Basketball Club, Inc., 815 F.2d 562, 568 (1987).
33 L.A. Mem’l Coliseum Comm’n v. Nat’l Football League, 726 F.2d 1381 (1984) (making the rule of reason test the applicable standard of review for sports leagues because of the unique structure and nature of professional sports leagues).
34 NHL Bylaws §3.3 Admission of New Members requires three-fourths of the League members voting in the affirmative and §3.5 Transfer of Membership or Ownership Interest in a Member Club requiring three-fourths consent of all members in the League.
35 Thomas Piraino, The Antitrust Rationale for the Expansion of Professional Sports Leagues, 57 OHIO ST. L.J. 1677, 1700 (1996).
36 Piraino at 1698.
37 Alan S. Glover, Ian J. Silverbrand, Phoenix Coyotes Bankruptcy Can Still Be Model for Troubled Sports Franchises, 27-FALL ENT. & SPORTS LAW. 4 at *5-6 (2009) (quoting Debtors Memorandum of Points and Authorities in Support of Motion to Sell Substantially All of Coyotes Hockey’s Assets (NHL Issues) ¶¶24-30).
