The Legal History
In this chapter, we maintain that antitrust law has for a long time sanctioned restraints on trade that are ancillary or incidental to otherwise lawful combinations. Our purpose in this appendix is to support that claim with a review of court findings. Contrary to the claims of the cartel proponents, the non-television restraints of the NCAA are not in violation of U.S. antitrust, at least as interpreted by the courts to the date of this writing.
The ancillary restraint doctrine was established as early as 1898 as an accepted American rule of interpretation of the Sherman Act.39 In United States vs. Addyston Pipe and Steel Co.,40 Judge Taft held that a contract or combination that produces an ancillary restraint is nevertheless reasonable and lawful as long as the main purpose of the contract, transaction, or combination was lawful and the restraint is limited in time, place, and manner of enforcement. The underlying rationale of the ancillary-restraint doctrine is based on the premise that the incidental restraint enhances the efficiency of the main agreement.41 Throughout the history of the Sherman Act, the doctrine has enjoyed wide application and acceptance, including in the sports market.
In Smith vs. Pro Football, Inc.,42 the District of Columbia Circuit applied the doctrine to its initial analysis of the National Football League (NFL) regulation of the player draft. The court recognized that the NFL was a legal combination in the traditional antitrust sense. Joint cooperation was essential for the production of professional football. Normal market forces did not operate in the sports market because teams and leagues are not “interested in driving [other teams] out of business, whether in the counting-house or on the football field, for if the league fails, no one team can survive.”43 The joint venture produced a new product; it also produced restrictions on the actions of members of the league and players. A rule of reason was used to judge the legality of the regulations necessitated by joint venture.44 Critical to the court’s analysis was the characterization that sports leagues operate as joint ventures with the purpose of producing new products and increasing demand, not as a cartel that restricts output or supply. The joint-venture analysis of Smith was recently followed when the Supreme Court considered the restrictions of the NCAA on college sports.
vs. Board of Regents
the Supreme Court, in a broad and sweeping decision, recognized the important role the NCAA plays in regulating collegiate sports.46
The court, specifically noting the NCAA’s regulation of “standards of amateurism, standards of academic eligibility, regulations concerning recruitment of athletes, and rules governing the size of the athletic squads and coaching staffs,”47
ruled that the NCAA was an association of colleges that compete against each other for athletes, fans, and television revenues.48
But the court was candid in recognizing that college sports is an “industry in which horizontal restraints on competition are essential if the product is to be available at all.”49
Quoting Robert Bork, the Court said “[S]ome activities can only be carried out jointly.”50
The product marketed was “competition itself—contests between competing institutions.”51
Finding that incidental restraints were essential for the production and success of the product, the Court reasoned:
Of course, this would be completely ineffective if there were no rules on which the competitors agreed to create and define the competition to be marketed. A myriad of rules affecting such matters as the size of the field, the number of players on a team, and the extent to which physical violence is to be encouraged or proscribed, all must be agreed upon, and all restrain the manner in which institutions compete.52
On college football, the court was specific in approving the non-television regulations of the sport: the regulations enhance consumer demand and choice, including the choices available to athletes.53 Because college football is a part of the academic tradition, the court found that ancillary restraints produced by the NCAA joint venture were essential “in order to preserve the character and quality of the product.”54 Absent mutual agreement by colleges on the regulation, the “integrity” of the product would be compromised and “might otherwise be unavailable.”55
The court concluded that the integration produced by the NCAA joint venture, while placing some limited restraints on colleges and athletes, actually promoted increased competition and output by producing a product distinguished from other sports entertainment, that is, from professional sports entertainment. The result enhanced consumers’ and athletes’ choices. On balance, the joint venture’s non-television regulation increased competitiveness. The restraints, maintaining the “competitive balance among amateur athletic teams,”56 are a “justifiable means of fostering competition among amateur athletic teams and are therefore procompetitive because they enhance public interest in intercollegiate athletics.”57
At bottom, the Supreme Court sanctioned many non-television regulations issued by the NCAA. Because the Court found that the “preservation of the student-athlete in higher education adds richness and diversity to intercollegiate athletics,”58 it is willing to give the NCAA “ample latitude to play that role,” a role “entirely consistent with the goals of the Sherman Act.”59 This conclusion was premised on the court’s implicit finding that amateurism and education are components of a market product, the promotion of which is procompetitive.60 As long as the NCAA regulations are designed for, and have the effect of, enhancing the market product and preserving sports amateurism and education, they will receive favorable review from the Supreme Court.61 Since NCAA, the antitrust outcome centers on the restraint’s effect on output and consumer demand and preference.62
This legal review is not intended to suggest that the NCAA does not have some modicum of market power or that market power is a precondition to liability under Section One of the Sherman Act. The Court in NCAA answered each of these concerns. First, the Court found that the NCAA does have market power in the regulation of television contracts.63 Second, the Court explicitly said market power is not a prerequisite for liability under a Section One charge,64 as is required under a Section Two claim. Although the Court did not decide whether the NCAA has market power over non-television aspects of the sports regulation, for our purposes, the issue need not be debated. Even if the NCAA has monopoly power, which is debatable in markets for athletes, monopoly power alone is not illegal. The question is whether that power is exercised and, if so, whether the result is a predatory or exclusionary practice—one that deters entry of a potential competitor by raising the costs of entry or one that discourages existing rivals from increasing output.65 The focus is on whether the monopoly conduct is designed to destroy or smother competition. The exercise of monopoly power does not refer to monopolistic pricing in the absence of entry barriers, but to the creation or preservation of market power by means that are anticompetitive.66 On this point, the Supreme Court decision in NCAA is clear.
Again, the court in NCAA recognized that certain market products cannot be produced without cooperation between competitors.67 Specifically, the NCAA’s non-television regulations over college sports were held lawful because they enhance output by increasing consumer and athlete demand.68 Contrary to a finding of monopolization (e.g., market power plus exclusionary practices), the Court concluded that the NCAA’s non-television regulations are ancillary but essential restraints that actually promote and more evenly distributed the market product of sports competition.
Implicit in this analysis is the finding that the NCAA did not act to reduce output or earn monopoly profits, as is the case with a traditional cartel or single-firm monopolist. Indeed, the creation and success of the rival CFA, which has the purpose of promoting the interest of major football colleges,69 belie the notion that the NCAA’s conduct increases the cost or defers the entry of a rival competitor. The non-television means used to achieve the integration of the NCAA’s joint venture produced efficiencies, not anticompetitive consequences, through reduction of transaction costs. The result is an increased demand for amateur sports. Like other joint-venture agreements, member colleges in the NCAA or CFA are able to obtain certain economies through lower costs that benefit not only the participating colleges but also consumers and athletes.70 The result is the creation of a new product market.71
This same economic approach used in NCAA
is evident as well in more recent Supreme Court antitrust jurisprudence. The one theme recurring throughout the recent cases is that economic efficiency is a valid business justification for conduct engaged in by a monopolist or by joint venturers.72
During the same court term as when NCAA
was decided, the court recognized in Cooperweld Corp
vs. Independence Tube Corp. 73
that integration and collective cooperation between related firms can produce efficiencies. Addressing whether a parent corporation and its wholly owned subsidiary would conspire within the meaning of the Sherman Act, Chief Justice Burger reasoned that:
Coordination within a firm is as likely to result from an effort to compete as from an effort to stifle competition. In the marketplace, such coordination may be necessary if a business enterprise is to compete effectively. … [To deny this reality] would serve no useful antitrust purpose but could well deprive consumers of the efficiencies.74
In Northwest Wholesale Stationers
the Court unanimously ruled that per se illegality does not result from a horizontal concerted refusal to deal unless the defendant “possesses market power or exclusive access to an element essential to effective competition.”76
This relaxed standard of analysis was accepted in spite of a longstanding per se rule of illegality for horizontal concerted refusals to deal or groups boycott.77
The justification for the changed legal standard again was an efficiency rationale that the challenged practice might “enhance overall efficiency and make markets more competitive.”78
Speaking for the Court, Justice Brennan observed that:
[N]ot every cooperative activity involving a restraint or exclusion will share … the likelihood of predominantly anticompetitive consequences. … [C] ooperative arrangements [may] seem to be “designed to increase economic efficiency and render markets more, rather than less, competitive.” The [purchasing cooperative] arrangement permits the participating retailers to achieve economies of scale in both the purchase and warehousing of wholesale supplies, and also ensures ready access to a stock of goods that might otherwise be unavailable on short notice. The cost savings and order-filling guarantees enable smaller retailers to reduce prices and maintain their retail stock so as to compete more effectively with larger retailers.79
Finally, in Aspen Skiing,80 the first monopolization case decided by the court in nearly twenty years, the court said a monopolist has “no general duty” to deal with a competitor. The right is not unqualified, however. As long as the conduct is not predatory or exclusionary, the monopolist can compete vigorously on the merits.81 But the monopolist cannot deliberately refuse to deal with a competitor that it has dealt with before, when that refusal would change the “character of the market” and hurt the competitor, in the absence of an efficiency justification.82
In Aspen Skiing, the court ruled against the monopolist because it failed to offer any business justification for the refusal to deal. From the lack of an efficiency defense, the court concluded that the defendant decided to forego short-run profit for the long-run effect of weakening competition.83 In characterizing the conduct, the court decided, “if a firm has been ‘attempting to exclude rivals on some basis other than efficiency,’ it is fair to characterize its behavior as predatory.”84 Thus, it is clear from Aspen Skiing that had the monopolist engaged in the restraint for the purpose of promoting efficiency (reducing long-run costs thereby increasing demand for the product), the court may well have deemed the refusal to deal lawful.
Read together, Cooperweld, Northwest Wholesale Stationers, and Aspen Skiing are authority for recognizing cooperation and integration as means of achieving cost-reducing efficiency objectives. Unlike raw cartels or single-firm monopolists, partially integrated associations, such as the NCAA joint venture, can increase output and consumer demand. The Court in NCAA found no less. Economic efficiency is sanctioned under the current antitrust laws, even when advanced by a horizontal agreement or a monopolist. Consequently, the NCAA’s non-television regulations are in apposite to the traditional cartel goal of reducing output and increasing price. Allocative efficiency is promoted and, as the Supreme Court has held, the predisposing characteristics of cartelization are not present in the NCAA non-television regulations.
In short, legal barriers do not prevent the continuation of the present NCAA regulations or the formation of alternative, competing leagues or associations from continuing or entering the market to compete against the NCAA for production and marketing of college sports. The emergence and presence of the CFA (or, for that matter, the NAIC or the NLCAA) are substantial evidence of a lack of barriers to entry.85 The current state of antitrust law encourages robust competition on the merits through efficiency-enhancing conduct. The NCAA’s and CFA’s regulations are paradigms of this type of competition.