North American Soccer League v. National Football League

The North American Soccer League (NASL) and certain of its member soccer teams (collectively referred to herein as "the NASL") appeal from a judgment of the Southern District of New York, Charles S. Haight, Jr., Judge, dissolving a preliminary injunction and dismissing a complaint seeking a permanent injunction and treble damages for alleged violations of § 1 of the Sherman Act, 15 U.S.C. § 1, by the defendants, the National Football League ("NFL") and certain of its member football clubs (collectively referred to herein as "the NFL"). The NFL cross appeals from the dismissal of its counterclaim, which sought an injunction barring owners of NASL member teams from cross-ownership of NFL teams. Because the conduct complained of by the NASL-an NFL ban on cross-ownership by NFL members of other major professional sports league teams (the "cross-ownership ban")-violates the rule of reason under § 1 of the Sherman Act, we reverse. We affirm the dismissal of the NFL's counterclaim.

The central question in this case is whether an agreement between members of one league of professional sports teams (NFL) to prohibit its members from making or retaining any capital investment in any member of another league of professional sports teams (in this case NASL) violates the antitrust laws. The answer requires an analysis of the facts and application of governing antitrust principles. Most of the facts are not in dispute. The NFL is an unincorporated joint venture consisting of 28 individually owned separate professional football teams, each operated through a distinct corporation or partnership, which is engaged in the business of providing public entertainment in the form of competitive football games between its member teams. It is the only major league professional football association in the United States. Upon becoming a member of the NFL a team owner receives a non-assignable franchise giving him the exclusive right to operate an NFL professional football team in a designated home city and "home territory," and to play football games in that territory against other NFL members according to a schedule and terms arranged by the NFL.1 See NFL Constitution and By-laws, §§ 3.4, 4.1, 4.2.

The success of professional football as a business depends on several factors. The ultimate goal is to attract as many people as possible to pay money to attend games between members and to induce advertisers to sponsor TV broadcasts of such games, which results in box-office receipts from sale of tickets and revenues derived from network advertising, all based on public interest in viewing games. If adequate revenues are received, a team will operate at a profit after payment of expenses, including players' salaries, stadium costs, referees, travel, maintenance and the like. Toward this goal there must be a number of separate football teams, each dispersed in a location having local public fans willing to buy tickets to games or view them on TV; a group of highly skilled players on each team who are reasonably well-matched in playing ability with those of other teams; adequate capital to support the teams' operations; uniform rules of competition governing game play; home territory stadia available for the conduct of the games; referees; and an apparatus for the negotiation and sale of network TV and radio broadcast rights and distribution of broadcast revenues among members.

To perform these functions some sort of an economic joint venture is essential. No single owner could engage in professional football for profit without at least one other competing team. Separate owners for each team are desirable in order to convince the public of the honesty of the competition. Moreover, to succeed in the marketplace by attracting fans the teams must be close in the caliber of their playing ability. As one commentator puts it

"there is a great deal of economic interdependence among the clubs comprising a league. They jointly produce a product which no one of them is capable of producing alone. In addition, the success of the overall venture depends upon the financial stability of each club." J. Weistart & C. Lowell, The Law of Sports § 5.11, at 757-58 (1979).

Earlier in this century various professional football leagues existed, outstanding of which were the NFL and AFL (American Football League). In 1970 the AFL merged into the NFL, after receiving Congressional approval to avoid violation of antitrust laws that would otherwise occur.2 Since then the NFL has assumed full responsibility for national promotion of professional football, granting of team franchises, negotiation of network TV contracts for broadcast rights with respect to its members' games, employment of referees, adoption of game rules, scheduling of season games between members leading up to the league championship game known as the Super Bowl, and many other matters pertaining to the national sport. Although specific team profit figures were not introduced at trial, the record is clear that the NFL and most of its members now generally enjoy financial success. The NFL divides pooled TV receipts equally among members. Pre-season gate receipts from each game are shared on a 50/50 basis between opposing teams, and regular season gate receipts are divided on the basis of 60% for the home team and 40% for the visiting team.

Although NFL members thus participate jointly in many of the operations conducted by it on their behalf, each member is a separately owned, discrete legal entity which does not share its expenses, capital expenditures or profits with other members. Each also derives separate revenues from certain lesser sources, which are not shared with other members, including revenues from local TV and radio, parking and concessions. A member's gate receipts from its home games varies from those of other members, depending on the size of the home city, the popularity of professional football in the area and competition for spectators offered by other entertainment, including professional soccer. As a result, profits vary from team to team. Indeed as recently as 1978, the last year for which we have records, 2 of the 28 NFL teams suffered losses. In 1977 12 teams experienced losses.3 Thus, in spite of sharing of some revenues, the financial performance of each team, while related to that of the others, does not, because of the variables in revenues and costs as between member teams, necessarily rise or fall with that of the others. The NFL teams are separate economic entities engaged in a joint venture.

The National American Soccer League ("NASL") was founded in 1968 upon the merger of two pre-existing soccer leagues. Like the NFL, the NASL is an unincorporated association of professional soccer teams whose members are separately owned and operated, and are financially independent. Its raison d'etre and the needs of its member teams are essentially the same as those of members of other major professional sports leagues, including the NFL. However, professional soccer is not as mature or lucrative as professional football. Just as was the case with NFL member teams a quarter of a century ago, NASL is struggling to achieve wider popularity and with it greater revenues. Consequently, the risk of investing in an NASL team is considerably greater than that of investing in the NFL.

Soccer was not a widely followed or popular sport when the NASL was founded, and several earlier attempts to put together a professional soccer league failed due to lack of fan interest. The NASL has been the most successful soccer league to date. The district court found that since the NASL was organized "professional soccer has experienced substantial and accelerated growth in fan interest, media following, paid attendance, number of franchises and geographic scope...." 505 F.Supp. 659 at 666-67. With this success NASL teams have become increasingly more effective competitors of the NFL teams. The two sports are somewhat similar. Their seasons substantially overlap. The teams have franchises from their respective leagues in the same locations and frequently use the same stadia. An increasing, although small, percentage of the public are switching their interest as fans and TV viewers from professional football to professional soccer, threatening to reduce revenue which NFL teams derive from gate receipts and TV broadcast rights. Competition between NFL and NASL teams has not only increased on an inter-league basis but also between individual NFL and NASL teams. On the league front both organizations compete for a greater share of finite national and regional TV broadcast and advertising revenues. At the local level NFL teams compete against NASL teams for greater fan support, gate attendance, and local broadcast revenues.

In spite of its success relative to other leagues that have attempted to make soccer a viable competitor, the NASL and its member teams have been, to this point, financially unsuccessful. Last year the teams collectively lost approximately $30 million. Individual NASL franchises have been very unstable; for example, since the trial of this case 8 of the 24 NASL teams have folded. Thus the NASL is the weakest of the major professional sports leagues (the NFL, the NASL, the National Basketball Association, the National Hockey League, and Major League Baseball).

Because of the interdependence of professional sports league members and the unique nature of their business, the market for and availability of capital investment is limited. As the district court found, the economic success of each franchise is dependent on the quality of sports competition throughout the league and the economic strength and stability of other league members. Damage to or losses by any league member can adversely affect the stability, success and operations of other members. Aside from willingness to take the risk of investing in a member of a league in which members have for the most part not demonstrated a record of profits, the potential investor must be reasonably compatible with other members of the league, with a sufficient understanding of the nature of the business and the interdependence of ownership to support not only his newly-acquired team but the sports league of which it is a member. As the district court further noted, these conditions have tended to attract individuals or businesses with distinct characteristics as distinguished from the much larger number of financiers of the type prevailing in most business markets. Although, as the district court observed, the boundaries of this "sports ownership capital and skill" market are not as confined as NASL contends and not limited strictly to present major league sports owners, the sources of sports capital are limited by the foregoing conditions and existing sports league owners constitute a significant source. In short, while capital may be fungible in other businesses, it is not fungible in the business of producing major league professional sports. Regardless of the risk involved in the venture, which may vary greatly from league to league, league members look not merely for money but for a compatible fellow owner, preferably having entrepreneurial sports skill, with whom the other members can operate their joint business enterprise. League members recognize, for example, that if the owner of one team allowed it to deteriorate to the point where it usually lost every game, attendance at games in which that team was playing would fall precipitously, hurting not just that team, but every other team that played it during the season. In view of this business interdependence team owners, through their leagues, are careful about whom they allow to purchase a team in their league and leagues invariably require that the sale of a franchise be approved by a majority of team owners rather than by the selling owner alone.

For these reasons individuals with experience in owning and operating sports teams tend to be the most sought-after potential owners. Indeed, the NFL made clear that it values proven experience in a potential owner. When in 1974 it expanded by 2 teams, 5 of the 8 prospective owners it considered seriously had professional sports team ownership experience; a sixth had experience in non-team sports. The two ownership groups to whom it awarded franchises included individuals with prior professional sports team ownership experience, and the NFL did not award the franchises to the highest bidder, a procedure that would have provided the most immediate financial reward to its owners.

The attractiveness of existing owners of major sports teams as sources of potential capital is further evidenced by the large number of members of major sports leagues who control or own substantial interests in members of other leagues. The record reveals some 110 instances of cross-ownership and some 238 individuals or corporations having a 10% or greater interest in other teams. Over the last 13 years there have been 16 cross-ownerships between NFL and NASL teams. Indeed, since the NASL was organized Lamar Hunt, the owner of the NFL's Kansas City Chiefs, has been involved as an NASL team owner, first of the Dallas Tornado team, then of the Tampa Bay team, and as a promoter of NASL. Since 1975 Elizabeth Robbie, the wife of the NFL's Miami Dolphins owner Joseph Robbie, has been the majority owner of the NASL's Fort Lauderdale franchise. Mr. Robbie has apparently been the actual operator of the soccer team as well as the football team. In the words of the district court, these cross-owners have provided the NASL with an "important element of stability," 465 F.Supp. 665 at 669, which led to professional soccer's becoming a major league sport, and withdrawal of their interests "would have a significantly adverse effect on the NASL," 505 F.Supp. at 668.4

Beginning in the 1950's NFL commissioners had a policy against a team owner maintaining a controlling interest in a team of a competing league, which was first put in writing by the owners themselves in January 1967, at a time when 12 owners of old NFL or AFL teams (the leagues had by then agreed to merge to form the present NFL) were involved in the formation of the predecessors of the NASL. The resolution, which was approved at an owners' meeting, called for the drafting of amendments to the NFL constitution and bylaws prohibiting cross-ownership, but nothing was ever done to comply with it. In 1972 the NFL owners passed another resolution providing that NFL owners were not to acquire operating control of a team in a competing league. The participants agreed that any member holding such a controlling interest would make a "best effort" to dispose of it.

For the next five years the NFL members repeatedly passed the same resolution at meetings, except through inadvertence in 1975. During this period the NASL, which had come close to disbanding in 1968, grew more successful, due in no small part to the efforts of Hunt, who worked tirelessly to promote professional soccer and raise capital for it. NFL owners began to feel competition from the NASL. Leonard Tose, the owner of the Philadelphia Eagles, became one of the most vocal opponents of Hunt's soccer holdings. At approximately the same time the NASL Philadelphia Atoms were leading that league in attendance, and Tose's NFL football team, the Philadelphia Eagles, was losing money. (The Eagles lost money from at least 1969 to 1974, and in 1976 and 1977.) Tose became particularly incensed when Hunt began doing promotional work for the NASL. For example, at one NFL owners' meeting Tose denounced Hunt for allegedly stating in an interview that soccer is the sport of the future. Tose later explained one of the reasons for his concern, stating, "in my view when our truck drivers (fans) have X number of dollars to spend for entertainment in sport, and (sic) any dollar that they spend in another sport could affect what they spend for football." In short, Mr. Tose's business, the NFL Philadelphia Eagles, was suffering from the competition from the NASL Philadelphia Atoms.

Tose was not the only NFL owner upset by competition from a soccer league team. Max Winter, the owner of the NFL's Minnesota Vikings, became concerned about competition from the Minnesota Kicks, an NASL member. As Tose had done, Winter complained about Hunt's NASL soccer team interest at NFL owners' meetings. At his deposition he stated, "I think I said it to the league, in the room, that I object very much that an American Football Conference President (i.e., Hunt) is going to Minneapolis to advance soccer, introduce soccer in my city." Winter discussed Hunt's activities with Tose, stating that he felt that the Kicks "are hurting us, the sports dollar, that they are drawing very well, that we are losing ground as far as media exposure, fan participation. (It g)enerally hurts us."

Finally in 1978 the NFL owners moved to take strong action against Hunt and Robbie. An amendment to the NFL by-laws was proposed that would require both to divest their soccer holdings if they wished to continue to own an NFL team. The proposed amendment, which was to have been voted on at an October 1978 NFL owners' meeting, would also have prevented all majority owners, certain minority owners, officers and directors of NFL teams, and certain relatives of such persons from owning any interest in a team in a "major team sport." The proposal was to amend Article IX of the NFL Constitution and By-laws by adding a new Section 9.4 as follows:

"9.4(A) No person (1) owning a majority interest in a member club, or (2) directly or indirectly having substantial operating control, or substantial influence over the operations, of a member club, or (3) serving as an officer or director of a member club, nor (4) any spouse or minor child of any such person, may directly or indirectly acquire, retain, or possess any interest in another major team sport (including major league baseball, basketball, hockey and soccer).

"(B) The prohibition set forth in subsection (A) hereof shall also apply to relatives of such persons (including siblings, parents, adult children, adult and minor grand children, nephews and nieces, and relatives by marriage) (1) if such person directly or indirectly provided or contributed all or any part of the funds used to purchase or operate the other sports league entity, or (2) if there exists between such person and any such relative a significant community of interest in the successful operation of the other sports league entity.

"(C) The Commissioner shall investigate, to the extent he deems necessary or appropriate, any reported or apparent violation of this Section and shall report his findings to the Executive Committee prior to imposition of disciplinary action by the Committee.

"(D) Beginning on February 1, 1980, any person who, after notice and hearing by the Executive Committee, is found to have violated subsection (A) or (B) above will be subject to fines of up to $25,000 per month for each of the first three months of violations; up to $50,000 per month for each of the next three months; and up to $75,000 per month thereafter. In addition, violations of more than six months' duration may be dealt with by the Executive Committee pursuant to Article VIII, Section 8.13(B).

"(E) If such person does not pay such fine to the League Treasurer within 20 days of its assessment, the unpaid amount thereof may be withheld, in whole or in part, by the Commissioner from available funds in possession of the League Office belonging to the member club with which the person in violation is affiliated."

As the district court found, the cross-ownership ban "has a concededly anticompetitive intent and, in its impact on the NASL, will probably have an anticompetitive effect." 505 F.Supp. at 689. The purpose of the ban was to weaken the NASL and its member teams so that they could not compete as effectively against the stronger, more mature, and lucrative NFL teams as they might be able to do with the aid of capital investment by NFL team owners.

On September 28, 1978, the NASL and various of its members commenced this action by serving the NFL with a complaint and an order to show cause why it should not be preliminarily enjoined from adopting the proposed amendment. On February 21, 1979, after hearing oral argument, Judge Haight issued a preliminary injunction prohibiting the enactment of the amendment. The judge found that the NASL would be irreparably injured if the NFL were allowed to adopt the amendment, that there were serious questions going to the merits, and that the balance of the hardships tipped in favor of the NASL. 465 F.Supp. 665. The NFL did not appeal the injunction.

A lengthy trial followed, and on November 17, 1980, Judge Haight issued his decision. 505 F.Supp. 659. Although he found that the purpose and impact of the NFL cross-ownership ban was to suppress competition in interstate commerce on the part of NASL and its members, he denied relief on the ground that in competing against NASL and its members the NFL and its members must be regarded as a "single economic entity," rendering § 1 of the Sherman Act inapplicable for the reason that it is limited to a plurality of actors. Recognizing that individual NFL teams compete with individual NASL teams for the consumer's dollar in their respective localities, the district court nevertheless concluded that this NFL team-member versus NASL team-member competition is subsumed in league versus league competition in the general entertainment market, which he described as "the primary economic competition in professional sports," 505 F.Supp. at 678, stating that in all relevant markets the competition is "between two single economic entities uncomplicated by any relevant competition between the member clubs of a league," id. at 685. Decisions rejecting sports leagues' contentions that they should be treated as "single economic entities" were distinguished on the ground that they involved different types of markets in which the members of a sports league were competing individually against each other (e.g., for players' services, hiring availability and terms, reserve clauses, college drafts, etc.), whereas here the court considered them to act monolithically as one joint enterprise. Supreme Court decisions in non-sports antitrust cases rejecting arguments that business trade restraints were justified on the ground that two or more participants had acted as a joint venture or "single business entity," e.g., Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951), and Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968), were distinguished on the ground those combinations, unlike sports leagues, were unnecessary to the successful production and marketing of the product involved, the district judge here stating, "No interdependence or joint action is necessary to make a bearing or a muffler." 505 F.Supp. at 686. Because individual teams acting alone could not produce "Pro Football," Judge Haight reasoned, the combination of those teams through the NFL was justified by its "dominant purpose," the production of the league sport, and was legal under Timken and Perma Life. For the same reason the judge refused to apply the rule of reason as articulated in National Society of Professional Engineers v. United States, 435 U.S. 679, 98 S.Ct. 1355, 55 L.Ed.2d 637 (1978).

Judge Haight further concluded that, while a sports ownership capital market may exist as a submarket of the broad capital funds market, the NASL and its members had failed to prove that the submarket was, as claimed by them, limited to present owners of major sports league teams. He declined to make any finding as to the scope of the submarket and whether the NFL cross-ownership ban foreclosed NASL teams from access to any significant share of it or restrained them from competing against NFL teams in the entertainment market. Instead he chose to rest his decision on the "single economic entity" theory.

NFL's two counterclaims were both rejected as without substance. With respect to the first counterclaim, which sought an injunction prohibiting the NASL and its member teams from engaging in cross-ownership with the NFL on the ground that such activity was analogous to interlocking directorates linking horizontal competitors, the judge ruled that the NFL had not shown any threat of injury from the alleged violation and, assuming that it had proved a threat of injury, an injunction would be mere surplusage because the NFL had the power to end cross-ownership itself.

The first issue is whether § 1 of the Sherman Act, which prohibits "(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 ..." applies to the cross-ownership ban adopted by NFL and its members. The NFL contends, and the district court held, that § 1 does not apply for the reason that the NFL acted as a "single economic entity" and not as a combination or conspiracy within the meaning of that law. We disagree. As the Supreme Court long ago recognized, the Sherman Act by its terms applies to "every" combination or agreement concerning trade, not just certain types. Chicago Board of Trade v. United States, 246 U.S. 231, 238, 38 S.Ct. 242, 244, 62 L.Ed. 683 (1918). The theory that a combination of actors can gain exemption from § 1 of the Sherman Act by acting as a "joint venture" has repeatedly been rejected by the Supreme Court and the Sherman Act has been held applicable to professional sports teams by numerous lesser federal courts. See, e.g., Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 141-42, 88 S.Ct. 1981, 1985-86, 20 L.Ed.2d 98 (1968); Timken Roller Bearing Co. v. United States, 341 U.S. 593, 598, 71 S.Ct. 971, 974, 95 L.Ed. 1199 (1951); Radovich v. National Football League, 352 U.S. 445, 449-52, 77 S.Ct. 390, 392-94, 1 L.Ed.2d 456 (1957); Silver v. New York Stock Exchange, 373 U.S. 341, 83 S.Ct. 1246, 10 L.Ed.2d 389 (1963); Associated Press v. United States, 326 U.S. 1, 65 S.Ct. 1416, 89 L.Ed. 2013 (1945); Linseman v. World Hockey Association, 439 F.Supp. 1315 (D.Conn.1977); Robertson v. National Basketball Association, 389 F.Supp. 867 (S.D.N.Y.1975); Philadelphia World Hockey Club Inc. v. Philadelphia Hockey Club, Inc., 351 F.Supp. 462 (E.D.Pa.1972); Smith v. Pro-Football, Inc., 593 F.2d 1173 (D.C.Cir.1978); Mackey v. NFL, 543 F.2d 606 (8th Cir. 1976), cert. denied, 434 U.S. 801, 98 S.Ct. 28, 54 L.Ed.2d 59 (1977); Los Angeles Memorial Coliseum Commission v. NFL, ("Coliseum II "), 484 F.Supp. 1274 (C.D.Cal.), rev'd on other grounds, 634 F.2d 1197 (9th Cir. 1980); Los Angeles Memorial Coliseum v. NFL,("Coliseum I "), 468 F.Supp. 154, 164 (C.D.Cal.1979); Bowman v. NFL, 402 F.Supp. 754 (D.Minn.1975); Kapp v. NFL, 390 F.Supp. 73 (N.D.Cal.1974), appeal vacated, 586 F.2d 644 (9th Cir. 1978), cert. denied, 441 U.S. 907, 99 S.Ct. 1996, 60 L.Ed.2d 375 (1979). Cf. San Francisco Seals Ltd. v. National Hockey League, 379 F.Supp. 966 (C.D.Cal.1974); Levin v. National Basketball Association, 385 F.Supp. 149 (S.D.N.Y.1974). We are unpersuaded by the efforts of the district judge to distinguish these cases from the present one. Although many involved player relations or playing sites, which affect competition between member teams, at least one raised issues between leagues. In Radovich v. National Football League, supra, the issue was whether an NFL boycott of a player who had previously accepted employment with a competing pro-football league, the All America Conference, violated § 1 of the Sherman Act. The Court held in Radovich that it did, even though that boycott might not, in the words of the district court, "implicate (or) impinge( ) upon competition between member clubs." 505 F.Supp. at 677.

The characterization of NFL as a single economic entity does not exempt from the Sherman Act an agreement between its members to restrain competition. To tolerate such a loophole would permit league members to escape antitrust responsibility for any restraint entered into by them that would benefit their league or enhance their ability to compete even though the benefit would be outweighed by its anticompetitive effects. Moreover, the restraint might be one adopted more for the protection of individual league members from competition than to help the league. For instance, the cross-ownership ban in the present case is not aimed merely at protecting the NFL as a league or "single economic entity" from competition from the NASL as a league. Its objective also is to shield certain individual NFL member teams as discrete economic entities from competition in their respective home territories on the part of individual NASL teams that are gaining economic strength in those localities, threatening the revenues of such individual teams as the NFL Philadelphia Eagles, owned by Leonard Tose, because of competition by the NASL's Philadelphia team, and the revenues of the NFL Minnesota Vikings because of competition by the successful NASL Minnesota Kicks. The NFL members have combined to protect and restrain not only leagues but individual teams. The sound and more just procedure is to judge the legality of such restraints according to well-recognized standards of our antitrust laws rather than permit their exemption on the ground that since they in some measure strengthen the league competitively as a "single economic entity," the combination's anticompetitive effects must be disregarded.5

Having concluded that § 1 of the Sherman Act is applicable, we next must decide whether the NFL teams' cross-ownership ban violates that statute. The plaintiffs, characterizing the ban as a "group boycott" and "concerted refusal to deal," contend that the conduct is a species of the patently pernicious anticompetitive kind that must be condemned as per se unlawful without further proof. See, e.g., United States v. Socony-Vacuum Oil Co., Inc., 310 U.S. 150, 60 S.Ct. 811, 84 L.Ed. 1129 (1940) (agreements between horizontal competitors to maintain price of their product); United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972) (allocation of market territories between horizontal competitors); United States v. General Motors Corp., 384 U.S. 127, 86 S.Ct. 1321, 16 L.Ed.2d 415 (1966) (conspiracy between manufacturers and distributors to eliminate price competition by discounters); Klor's, Inc. v. Broadway-Hale Store, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959) (agreement between 10 competing national manufacturers and their distributors not to sell products to petitioner or to sell only at discrimin