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Antitrust risks to college football realignment scenarios (article)

The antitrust risks to some college football conference real...
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Date: September 11th, 2019 1:50 AM
Author: Woah Cr friend!

The antitrust risks to some college football conference realignment scenarios

Robert Litan

Another college football season has begun. And what better way to start it off than by using a legal lens to examine the possible scenarios for college football conference realignment, triggered as current TV contracts expire, outlined in a July 25 article authored by The Athletic college football editor-in-chief Stewart Mandel.

Since I tend to correspond regularly with sports economists, and occasionally attorneys, who are quite knowledgeable about the antitrust laws, I was not surprised when I heard from several who had read Mandel’s article. Without exception, they raised the question: how should or would (they are not the same thing) the various possibilities Stewart outlines fare under the most relevant Supreme Court decision relating to college football TV contracts, NCAA v. Board of Regents of Oklahoma, handed down in 1984? That decision was central to the Ninth Circuit Court of Appeals decision issued in mid-August sending the lawsuit filed by DirecTV subscribers back to a California district court for trial (if not ended through the other means I described).

Several raised another question: how would the various conference combinations fare under the Justice Department’s Merger Guidelines, and then in court, if challenged?

To answer these questions, which relate to two separate antitrust statutes, let’s first take a quick look into each of these laws and their relevance to conference realignments.

College football fans today, used to seeing football games featuring their teams on multiple channels, seemingly any time anywhere, may find it hard to fathom the way things used to be. But they were different, which is apparent in the facts that brought the NCAA v. Board of Regents of Oklahoma case to the Supreme Court.

Beginning in 1951, the NCAA limited the number of TV telecasts of college football games in order not to discourage live attendance at games. TV contracts typically lasted one or two years. In 1981, for the first time, the NCAA negotiated two four-year deals, each with ABC and CBS, limiting the number of games to 14 for each network, and imposing a maximum of six appearances for a single college, split between the two networks. The agreement also allowed the networks to negotiate broadcast fees with individual schools, but followed an NCAA-recommended practice of paying the schools certain sums, with the highest amounts going for national telecasts of Division I games, and lesser amounts for regional broadcasts of other Division I contests, and still lower amounts for Division II and III game broadcasts.

Many schools didn’t like these limits, including the University of Oklahoma, which has long been a football powerhouse, and so they formed a separate College Football Association (CFA), which reached to a deal with NBC allowing more football appearances for each college than the NCAA contract allowed. The NCAA opposed this arrangement and threatened disciplinary action against CFA schools. Two of the latter, Oklahoma and the University of Georgia, sued the NCAA, claiming that it was unlawfully restraining trade in the “live college football television market” in violation of Section 1 of the Sherman Antitrust Act of 1890, the first antitrust statute enacted in the U.S. and the first one under which any conference realignment would be considered.

In this case, which has come to be known as NCAA v. Board of Regents of Oklahoma, the trial court agreed with Oklahoma (and the CFA). The NCAA appealed that decision to the 10th Circuit Court of Appeals, which essentially ratified the trial court decision. More precisely, the appellate court held that the NCAA’s television plan constituted illegal per se price-fixing – a category of conduct that courts condemn because it always has no justification – but that it was also unlawful even under a more relaxed “rule of reason” standard which allows defendants to prevail if they can show that the pro-competitive impacts of their restrictions outweigh any anti-competitive effects.

Not to be deterred, the NCAA appealed to the Supreme Court, where the NCAA lost again, but this time only on a “rule of reason” analysis. The Court reaffirmed the lower courts’ findings that the TV contracts did reduce the number of telecasts and increased the price of live attendance – standard impacts of anti-competitive conduct – and that they did so without having any justifiable pro-competitive impact to offset the competitive harm.

Nonetheless, the NCAA did gain one small doctrinal victory. By acknowledging that some restraints by the NCAA may be appropriate under some circumstances, the Board of Regents decision didn’t automatically condemn all NCAA restrictions, but rather set a precedent for future antitrust challenges to the NCAA’s conduct: to prevail, plaintiffs must show that the bad effects of the restraints outweigh the good. Courts have used that framework to strike down the NCAA’s limits on athletic scholarships, but have kept them tied to “educational purposes,” while upholding (so far) the NCAA’s rules against athletes accepting compensation for their names, images and likenesses (NIL rights).

Meanwhile, the world of college sports broadcasting has changed radically in the wake of the Board of Regents decision. You can pretty much can find any college football or basketball game you want being telecast by someone, and you can thank the Supreme Court’s decision in Board of Regents for that result.

The Sherman Act is only one of two major antitrust statutes, however. The Sherman Act focused explicitly on unlawful arrangements between competitors (Section 1) and acts of monopolization (Section 2), but didn’t explicitly focus on mergers between firms, although in the famous Standard Oil case, resulting in the breakup of that oil giant, the Supreme Court did address mergers that enabled a company to reach a monopoly.

But what about mergers whose effects fell short of monopoly? Congress wanted a more preventative statute, and it passed one in the Clayton Antitrust Act of 1914. Among other things, the Clayton Act allows the Department of Justice or the Federal Trade Commission to challenge mergers that whose effect “in any line of commerce or in any activity affecting commerce in any section of the country (the “relevant market”) may be to substantially threaten competition or tend to create a monopoly.” (emphasis added). States typically have parallel anti-merger laws, and in unusual cases, as in the Sprint-Mobile merger, can challenge mergers in court even if the federal authorities will not.

Mergers are classified by type, and the ones that tend to draw the most scrutiny are “horizontal mergers” – between two competitors in the same business in the same geographic area – in “concentrated” markets (where a few competitors have most of the business). The agencies provide more detail about how they decide whether to challenge horizontal mergers in “Merger Guidelines” that have been refined over the years, but on the whole have not changed that much. Given the NCAA’s Board of Regents definition of the “relevant market” as being competition in “live sports (or college football) television market,” that probably (but not necessarily) would be the same market courts would use to assess the impact of any future conference alignment, driven by the schools’ desire for more TV revenues, if it were challenged under the Clayton Act.

(If you’re wondering how the antitrust authorities ever let the airline industry shrink through merger to just four dominant airlines, it is because technically, most while all airline mergers involve firms in the same business, most of the mergers combined airlines flying different routes, and therefore were treated as competing in different “geographic markets.” Because of this, airline mergers technically have been treated as “conglomerate” mergers, which the courts have never struck down).

Are you now ready for some football? Or more precisely, are you now ready for some antitrust analysis of conference football realignment?

To get things started, here’s a brief summary of Mandel’s possible new conference (or independent) arrangements, and their justifications, solely for football, at some point:

— The Big 12 (currently only 10)/Pac-12 expand (to enlarge geographic footprint and TV audience)

— Blue bloods (such as USC, Oklahoma and Texas) go independent (to keep more TV revenue for themselves)

— Power Five conference schools (65) sell their TV rights package (assuming existing conference contracts can be synched) and possibly scheduling only games against each other (to strengthen their schedules and attractiveness of the TV package)

— A Premier League of the Top 28 (or some other similar number) teams, in four regional divisions, and division champions competing in a national playoff, analogous to the NFL (proposed before by Mandel).

Neither of the first two options – conference enlargement or blue blood independency – raise any significant antitrust concerns, under either Board of Regents or Clayton Act merger law. Participating schools are free under the law, with rare exceptions, to decide where they want to belong.

The Power Five or the Premier League realignments – or what might be called the “concentrating realignments” — would constitute a major restructuring of competition in college football along with the way their TV rights are sold. The latter, more so than the former, could raise at least some questions under both the Sherman and Clayton Acts.

The Sherman Act concerns grow out of the Board of Regents decision which nixed the ability of the NCAA to negotiate single national TV broadcasts on behalf of all its members schools. Concentrating a television package entirely for schools belonging to the Power Five or within a new Premier League could raise similar concerns, with a case possibly brought against either arrangement by schools outside either of the two new more “exclusive clubs.” Technically, the claims would be couched as an unlawful “group boycott” by the insiders against the outsiders. Typically group boycotts are automatically unlawful under Section 1 of the Sherman Act, which prohibits restraints of trade among competitors.

But, as the earlier summary indicated, Board of Regents also established that joint arrangements among collegiate athletic programs are not automatically forbidden, but instead must be judged by balancing pro-competitive effects, if any, against any anti-competitive effects of the joint activity in question. Schools on the outside of either arrangement, if they challenged it, could be expected, through their attorneys and experts, to argue that concentrating TV rights with the “Goliaths” would effectively relegate or entirely freeze out the “Davids,” or smaller football programs from the national TV market and audience. Those schools outside the club would lose TV rights money, and their fans might even be forced to watch fewer games, since regional or local networks arguably would be less interested in carrying their games. The net result, so the challengers would argue, would be less output and/or fewer choices for football fans, a classic anti-competitive effect.

Members of the new alliances, or more precisely their attorneys and experts, presumably would respond that either realignment effectively would create a “new product” of elite football broadcasts, one that would generate more fan interest in college football than is the now case because lopsided Goliath vs. David competitions would be eliminated. So, the argument would go, college football fans would have greater interest in watching college football even in the early weeks of the season, when such contests typically take place, generating even more interest in the sport (and, of course, more TV rights money for games involving teams belonging to the more exclusive clubs).

Faced with these competing claims, under a legal rubric of balancing effects, how would a court decide? The presumptive answer favors defendants, and thus any new conference alignment, since “rule of reason” antitrust cases – in which every matter but the kitchen sink is offered by experts on each side for courts to consider – are generally difficult for plaintiff to win.

But to mix sports metaphors, that outcome is not a slam dunk, for two reasons. One is that the schools on the outside that might challenge either of the concentrating realignments might be successful in “forum shopping,” or finding a federal district (and correspondingly a federal circuit of appeals) that could give them some advantage. The fact that either of concentrated realignments would contain schools from all over the country would give challengers a lot of choice about where to sue. Of course, whether the challengers would get such a trial judge likely to favor their claims would be mostly a matter of luck, since federal cases generally are assigned to judges randomly.

The challengers might also have a better shot if they opt to have their case decided by a jury rather than a judge, but only in a location where many of the potential jurors would not have attended one of the schools in the exclusive club. Having a judge from an “outside school” preside over legal rulings, pre-trial discovery and motions, would also help challengers.

The bottom line: a challenge to either of concentrating alignments under the Board of Regents “rule of reason” standard would be an uphill though not impossible challenge.

What about a challenge to either concentrating alignment as an unlawful merger? Such a challenge, at least in theory, could come from either the federal government (most likely the Justice Department, which historically has overseen antitrust issues related to colleges) or by one any or more of attorneys general of the 50 states, the schools left outside one of the elite new clubs, or possibly by one or more broadcasters.

Any court considering such a challenge to a merger – if the court decides that such a realignment is functionally equivalent to a merger – would first define the “relevant market.” In Board of Regents the market was “live college football telecasts” broadly.

If that definition were applied to any assessment of a conference realignment, then government challengers might argue that the concentration of broadcast rights for effectively a new super conference or league would require the broadcasters to pay more for telecast rights than they do now, since the “David-Goliath” games would be removed from the national package. But that argument implicitly concedes that the broadcasters would be bidding for a more valuable, and arguably, different product than the individual conference television packages that are now sold. Such an argument seems plausible, and thus would make any challenge based on impact to broadcasters difficult to win.

The same outcome also seems likely if a court, in a future challenge, finds that the concentrated realignments effectively would have created two different televised college football products and thus two different relevant markets: one for those games involving schools inside the new exclusive clubs and the other for games involving schools outside those clubs. The buyers of telecasts in those two different markets thus would be getting different products, at different prices, than existed before the realignments, presenting a court with a novel fact situation. My educated guess is that courts would be unlikely to interfere with this rearrangement and hold that competition has been lessened when the markets themselves have been redefined.

Of course, a court might not get to the merger analysis if it were to decide that any conference agreement amounts only to a contractual relationship, rather than a single entity. If that were the case, the only relevant antitrust statute would be the Sherman Act, as already discussed.

One final thought: college sports broadcasting contracts are not covered by the Sports Broadcasting Act of 1961 (“SBA”), which exempted from the antitrust laws only those contracts for “sponsored broadcasts” (or free television, paid for advertising) of games of the four major professional sports and their leagues — NBA, NFL, NHL and MLB – and for the NFL in particular, only if its games were not televised on Friday nights or Saturday, days then (and since) reserved for college football.

Congress passed the SBA so that all professional teams in each league would share equally from the better prices that league-wide televised packages could command from network broadcasters than would be the case if smaller market teams had to negotiate TV contracts on their own. This result was desired in order to enhance “competitive balance” among league members, and specifically to keep smaller market teams from being permanently disadvantaged vis-à-vis larger market teams.

Since the SBA does not apply to college sports, either of the concentrated realignment possibilities outlined by Mandel would allow the schools inside the new exclusive clubs to earn more than they do now from televised broadcasts, with other schools likely earning less. But since the “inside the club” and “outside the club” schools no longer would be competing against each other – at least in football – the impact on “competitive balance” within Division I schools, as a whole, would become irrelevant.

(Photo: Tim Warner / Getty Images)