Self-Regulation and League Rules Under the Sherman Act

AuthorMark C. Anderson
PositionJudicial Law Clerk to the Honorable John E. Steele, United States District Judge, Middle District of Florida

Page 125

    Mark C. Anderson: Admitted to the Bar of the Commonwealth of Pennsylvania. J.D. 2000, Widener University School of Law. B.A. 1994, Messiah College.
I Introduction

As the old adage goes, "it's not whether you win or lose, it's how you play the game."1In today's professional sports context, where off-field cooperation presumably enhances on-field competition,2conforming to a basic set of rules may in fact be "essential to survival" for sports leagues.3

To that end, leagues must promulgate rules that will level the playing field among competitors, such as barring players of a certain age from participating in a sport or preventing the relocation of a franchise, often to the detriment of teams and individual competitors. The courts are continually asked to ascertain the legality of such restraints through the lens of the Sherman Act,4with the bottom-line purpose of protecting the ultimate consumers of professional sports, the fans.

Although historically self-regulation within an industry was determined to be unreasonable without considering the specific facts and circumstances, the courts eventually realized that a more searching analysis was necessary to balance the procompetitive and anticompetitive effects of the restraint. In recent years, the Supreme Court has made repeated use of a middle ground approach that would avoid automatic condemnation without getting bogged down in a detailed analysis. The lower courts, however, have been reluctant to seize upon this "quick look" approach, opting instead for a full-blown analysis of all the factors, resulting in lengthy litigation and squandering of judicial resources.

Section II of this article provides a brief history of the Sherman Act and distinguishes sections one and two of the Act.5This section also explains when the per se rule and the rule of reason should be applied and introduces the reader to a middle ground approach, the "quick look."6In Page 126 addition, section II discusses the use of the single entity theory as a line of first defense and surveys relevant exemptions to the Sherman Act.7

Section III highlights the Supreme Court's interpretation of the "concerted action" requirement.8Section IV considers the courts' treatment of self- regulation in various industries.9Section V of this article tracks the treatment that professional sports leagues have received in the regulation of sports.10Section VI suggests that lower courts must seize upon the "quick look" approach in resolving antitrust disputes in the sports industry, while cautioning that judicial experience may not provide sufficient basis for applying the "quick look" to individual sports.11

II Background
A The Sherman Act
1. History

The Sherman Act prohibits unreasonable restraints on trade and monopolization.12Although antitrust jurisprudence originated nearly four hundred years ago,13Congress did not enact the first modern antitrust law until 1890.14The driving force behind the Sherman Act was a desire to curb abuses of economic power by major industrial "trusts" and railroad companies.15Senator John Sherman, the Act's chief sponsor, intended it to "declare 'general economic principles,'" as a blueprint for the way Page 127 commerce ought to be conducted in the United States.16He explained that the power of trusts amounted to "a kingly prerogative, inconsistent with our form of government."17Sherman reasoned that "if we will not endure a king as a political power, we should not endure a king over the production, transportation and sale of any of the necessaries of life."18

Whether in the late nineteenth century or in the early dawn of the third millennium, most scholars agree that the underlying purpose of the Sherman Act was and continues to be to promote consumer welfare by enhancing economic efficiency in commerce.19The Supreme Court characterized the Act as "a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade."20

There is little dispute that the best way to achieve this goal is through free competition.21Beyond that, however, consensus in this area of law has been mostly elusive; having framed the Sherman Act in broad terms, Congress has left it to the courts to determine whether an antitrust violation has transpired.22

2. Section One of the Sherman Act

Section one of the Act prohibits contracts, combinations, or conspiracies that restrain interstate commerce.23These activities, which necessarily require two or more parties, are commonly referred to as "concerted action."24Section one targets such activities because "Congress believed concerted action to be more dangerous than unilateral action and thus it is regulated more strictly."25The Supreme Court has Page 128 emphasized that "[c]oncerted activity inherently is fraught with anticompetitive risk."26

To prove a section one violation, one must establish three elements: (1) concerted action between the defendant and a third party, (2) restraint on trade, and (3) the effect on interstate or foreign commerce.27

First, concerted action can be shown by either express agreement or by evidence that tends to exclude the possibility of independent action by the parties.28Second, although section one prohibits restraints on trade or commerce, the Supreme Court held early on that such prohibition applied only to unreasonable restraints.29Courts have used two methods, to determine whether an agreement unreasonably restrains trade: the per se rule, normally reserved for presumptively unreasonable restraints,30and the rule of reason, which requires a balancing of the procompetitive and anticompetitive effects of the restraint on competition in a relevant market.31Finally, to show the restraint affects interstate commerce, a plaintiff must establish that "the challenged activity involves 'trade or commerce' and . . . [that] such trade or commerce has the requisite interstate or international effect."32Page 129

3. Per Se Rule

Courts have identified certain "conduct that is so often anticompetitive that it deserves condemnation as unreasonable without detailed inquiry into facts and circumstances."33It is generally accepted that restraints such as price fixing, horizontal market division, group boycotts, and tying arrangements are presumptively unreasonable.34

Application of the per se rule circumvents the need for the in-depth inquiry into facts and circumstances required under the rule of reason.35While some restraints will require practically no factual inquiry,36others may have valid procompetitive effects that may demand further analysis.37

Because application of the per se rule obviates a detailed analysis, the Supreme Court has limited its use to types of restraint which require no elaborate study to conclude that they are plainly anticompetitive.38

4. Rule of Reason

While the per se rule is expedient, its use is fairly limited.39The majority of antitrust causes of action will demand a more exacting analysis of the alleged agreement or conduct.40As the Supreme Court explained, the legality of an agreement or regulation cannot be determined by so simple a test as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps Page 130 thereby promotes competition or whether it is such as may suppress or even destroy competition.41

In order to demonstrate that an agreement is unlawful under the rule of reason, it must be shown that (1) there was an agreement, (2) the agreement impacted competition in a particular market, and (3) that the procompetitive benefits of the agreement were outweighed by the anticompetitive effects.42

The plaintiff normally bears the burden of showing that a particular restraint has a substantial anticompetitive effect.43Once established, it is incumbent upon the defendant to demonstrate procompetitive benefits.44The court will then require the plaintiff to show "that the restraint was not reasonably necessary to achieve the benefits."45

One must bear in mind that the rule of reason is not a measure of "reasonableness;" rather, the rule is used to determine whether a restraint "tends to suppress or destroy competition without adequate procompetitive justification."46The purpose of the rule is to further the goals of antitrust law, namely the preservation of competition and the promotion of economic efficiency.47

5. The "Quick Look" Approach

Recently, a third approach that falls somewhere between the per se approach and the rule of reason has been introduced in order to evaluate unlawful restraints.48The "quick look" approach avoids automatic condemnation of a restraint but does not require an in-depth analysis to evaluate the restraint.49The Supreme Court has instructed that "quick- Page 131 look" or abbreviated rule-of-reason analysis may be appropriate when "the great likelihood of anticompetitive effects can be easily ascertained" in cases that are not suitable for automatic per se treatment.50Although there exists some inconsistencies as to the standard to follow in applying a "quick look" analysis, such an analysis...

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