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Author: Luke Hasskamp

This article—the third in a series—focuses on the Supreme Court’s decision in Federal Baseball Club v. National League, in which the Court unanimously held that federal antitrust laws did not apply to professional baseball. It is a curious decision, indeed, preceded by two prior decisions that helped to set the table.

Despite the focus of this series of articles on baseball’s unusual treatment under the antitrust laws, the first two articles did not actually address antitrust law. Instead, the focus was, primarily, contract law. Despite the clear anticompetitive implications of baseball’s reserve clause, which owners used to tie players to a team in perpetuity and to suppress player salaries, the initial challenges to these provisions were based on the law of contracts. And the initial lawsuits did not involve affirmative litigation brought by players but were instead brought by the owners, with the players raising these arguments in their defense.

Now the stage was set for the antitrust laws to enter the picture full force, and not just as a shield to protect players from teams’ requests for injunctions, but also as a sword to affirmatively attack professional baseball as an unlawful trust.

You can find the other parts to this series below:

Baseball and the Antitrust Laws Part 1: The Origins of the Reserve Clause

Baseball and the Antitrust laws Part 2: The Owners Strike Back (and Strike Out)

The antitrust laws and baseball finally intersect: the Hal Chase case

The first antitrust baseball case fully litigated on the merits was American League Baseball Club v. Chase, 149 N.Y.S. 6 (N.Y. Sup. Ct. 1914), a dispute involving Hal Chase, a star first baseman who moved from the Chicago White Sox of the American League to the Buffalo Buff-Feds of the Federal League.

The suit was brought in New York by the White Sox, who sought to enjoin Chase from playing for Buffalo. At the conclusion of the matter, Judge Bissell rejected Chase’s “novel argument . . . presented with much earnestness” that baseball violated federal antitrust laws. The Sherman Act makes it unlawful to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States . . . .” Judge Bissell had no doubt that baseball was a monopoly, but he concluded that it was not involved in interstate trade or commerce. Instead, he reasoned: “Baseball is an amusement, a sport, a game that . . . is not a commodity or an article of merchandise subject to the regulation of congress . . . .” (Congress is constrained by the Commerce Clause of the U.S. Constitution. Thus, the connection to interstate commerce was essential. If baseball did not affect interstate commerce, Congress had no power to regulate it.)

Interestingly, Judge Bissell did rule that baseball had violated New York state law, meaning that the preliminary injunction initially granted could no longer be maintained. And his reasoning suggested that he also would have found baseball to have violated federal antitrust laws had it affected interstate commerce:

“A court of equity insisting that ‘he who comes into equity must come with clean hands’ will not lend its aid to promote an unconscionable transaction of the character which the plaintiff is endeavoring to maintain and strengthen by its application for this injunction. The court will not assist in enforcing an agreement which is a part of a general plan having for its object the maintenance of a monopoly, interference with the personal liberty of a citizen and the control of his free right to labor wherever and for whom he pleases; and will not extend its aid to further the purposes and practices of an unlawful combination, by restraining the defendant from working for any one but the plaintiff.”

Thus, with his legal victory, Chase was able to play with Buffalo for 1914 and 1915. While it was not a devastating blow for organized baseball—because “the question of the dissolution of this combination on the ground of its illegality” was not before the court—it must have seemed like an ominous conclusion to the ruling.

Chase ended up having a remarkable career for several reasons. Many players, including Babe Ruth and Walter Johnson, considered him the best first baseman ever, and he is sometimes considered the first true star of the franchise that would eventually become the New York Yankees. But Chase was also ultimately exposed as a notorious cheater, betting extensively on games and paying and receiving money to fix games. Indeed, he was indicted as part of the Chicago “Black Sox” scandal (though his role is disputed), but the State of California refused to extradite him due to a problem with the arrest warrant. He was ultimately blackballed from professional baseball and spent his remaining years on the west coast.

The Federal League takes on Organized Baseball: Round 1

In 1913, the Federal League emerged as a serious competitor to the National and American Leagues. And it intended to do so in court, as well as on the field, where it would wield the threat of a serious antitrust challenge. Indeed, in January 2015, the Federal League finally filed its affirmative suit against the National and American Leagues in federal court in Illinois, alleging that they amounted to a combination in violation of federal and state antitrust laws.

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Author: Luis Blanquez

We’ve discussed the state action doctrine many times in the past. The courts have interpreted the federal antitrust laws as providing a limited exemption from the antitrust laws for certain state and local government conduct. This is known as state-action immunity.

In this article, we will discuss how the FTC and DOJ have approached this important antitrust exemption over time. And we are going to do it in several steps. First, we will examine the early stages, with the creation of the State Action Task Force. Second, we will consider the reflections from former FTC Commissioner Maureen K. Ohlhausen on the Supreme Court’s 2015 North Carolina Dental Decision; and the  FTC Staff Guidance on Active Supervision of State Regulatory Boards Controlled by Market Participants. Last, we will spend some time on what is an amicus brief, and will analyze some of the most recent briefs on state action immunity filed by the FTC and DOJ.

You might also enjoy our article on why you should consider filing an amicus brief in a federal appellate case.

  1. THE FIRST STEPS: THE MODERN STATE ACTION PROGRAM

In September 2003, the State Action Task Force of the FTC published a report summarizing the state action doctrine, explaining how an overbroad interpretation of the state action doctrine could potentially impede national competition goals. The Task Force stressed that (i) some courts had eroded the clear articulation and active supervision standards, (ii) courts had largely ignored the problems of interstate spillover effects, (iii) and that there was an increasing role for municipalities in the marketplace.

To address these problems, the FTC suggested in its report that the Commission implement the following recommendations through litigation, amicus briefs and competition advocacy: (1) re-affirm a clear articulation standard tailored to its original purposes and goals, (2) clarify and strengthen the standards for active supervision, (3) clarify and rationalize the criteria for identifying the quasi-governmental entities that should be subject to active supervision, (4) encourage judicial recognition of the problems associated with overwhelming interstate spillovers, and consider such spillovers as a factor in case and amicus/advocacy selection, and (5) undertake a comprehensive effort to address emerging state action issues through the filing of amicus briefs in appellate litigation.

Finally, the report outlined previous Commission litigation and competition advocacy involving state action.

  1. PHOEBE PUTNEY AND NORTH CAROLINA DENTAL

FTC v. Phoebe Putney Health Sys. Inc., 133 S. Ct. 1003 (2013).

In Phoebe Putney, two Georgia laws gave municipally hospital authorities certain powers, including “the power ‘[t]o acquire by purchase, lease, or otherwise and to operate projects.” Under these laws, the Hospital Authority of Albany tried to acquire another hospital. Such laws provided hospital authorities the prerogative to purchase hospitals and other health facilities, a grant of authority that could foreseeably produce anticompetitive results.

The Supreme Court reaffirmed foreseeability as the touchstone of the clear-articulation test, id. at 226–27, 113 S. Ct. at 1011, but placed narrower bounds to its meaning. In particular, the Supreme Court held that “a state policy to displace federal antitrust law [is] sufficiently expressed where the displacement of competition [is] the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” Id. at 229, 113 S. Ct. at 1012–13. “[T]he ultimate requirement [is] that the State must have affirmatively contemplated the displacement of competition such that the challenged anticompetitive effects can be attributed to the ‘state itself.’” Id. at 229, 113 S. Ct. at 1012 (citation omitted)

Jarod Bona filed an amicus brief in this case, which you can read here. You can also read a statement from the FTC on this case here.

North Carolina State Board of Dental Examiners v. FTC Decision

We have written extensively about this case in the blog. Please see here and here.

In a nutshell, the FTC took notice, brought an administrative complaint against the board, and ultimately found the board had violated federal antitrust law. Importantly, the FTC also held that the board was not entitled to state-action immunity because its actions interpreting the dental practice act were not reviewed by a disinterested state official to ensure that they accorded with state policy. The Fourth Circuit agreed with the FTC, and the Supreme Court granted certiorari.

The case centered on whether a state professional-licensing board dominated by private market participants had to show both elements of Midcal’s two-prong test: (1) a clear articulation of authority to engage in anticompetitive conduct, and (2) active supervision by a disinterested state official to ensure the policy comports with state policy. Previous Supreme Court decisions exempted certain non-sovereign state actors, primarily municipalities, from the active supervision requirement. The board argued it should be exempt as well.

The Supreme Court rejected the board’s arguments and held that “a state board on which a controlling number of decisionmakers are active market participants in the occupation the board regulates must satisfy Midcal’s active supervision requirement to invoke state-action antitrust immunity.”

Bona Law also filed an amicus brief in this case, which you can find here.

In the wake of this Supreme Court decision, state officials requested advice from the FTC about antitrust compliance for state boards responsible for regulating occupations. Shortly after, the FTC published its Staff Guidance on Active Supervision of State Regulatory Boards Controlled by Market Participants. The Commission provided guidance on two questions. First, when does a state regulatory board require active supervision in order to invoke the state action defense? Second, what factors are relevant to determining whether the active supervision requirement is satisfied. If you want to read our summary of the guidance please see here.

  1. THE TOOL OF THE FTC AND DOJ: AMICUS CURIAE BRIEFS

An amicus curiae brief is a persuasive legal document filed by a person or entity in a case, usually while the case is on appeal, in which it is not a party but has an interest in the outcome. Amicus curiae literally means “friend of the court.” Amicus parties try to “help” the court reach its decision by offering facts, analysis, or perspective that the parties to the case have not. There is considerable evidence that amicus briefs have influence, and appellate courts often cite to them in issuing their decisions.

As far as the state action immunity is concerned, the DOJ and FTC have published several amicus briefs. Here are some particularly relevant ones:

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Author: Steven Madoff

Steven Madoff is a former Executive Vice President at Paramount Pictures and General Counsel for its Home Entertainment Subsidiary. He is Of Counsel at Bona Law.

When you see someone acting strangely, do you ever wonder if they are possessed? If you do, it might be because of the everlasting influence of a classic film that I am certain you know: The Exorcist.

One of the great joys of a film is that you can turn down the lights, let your problems disappear, and enter a meditative zone where you become engrossed in the movie and nothing else. You surely know that a lot goes into making a film and that it takes many talented people working really hard to do it well.

But do you ever think about how much thought, work, and fighting (yes, fighting) goes into marketing, distributing, and monetizing a film? Indeed, because films continue to make money for years and sometimes decades after they are made—especially for a classic film like the Exorcist—the battles over revenue and its dissemination can be everlasting.

During my decades at the studios and in the film industry, I had a front row seat to the methods, money, and machinations of the entertainment industry.

Even still, after I left Paramount Pictures, I did not think of myself as an “expert.” I had worked at Paramount for 20 years, the last ten of which I served as Executive Vice President of Worldwide Business and Legal Affairs for the Home Entertainment and Pay Television Divisions. I had also worked at the Motion Picture Association of America for five years in a business development position and then as International Counsel. The Motion Picture Association of America is the trade association representing the interests of the (at the time) seven major Hollywood Studios: Disney, MGM/United Artists, Paramount, Sony Pictures, Twentieth Century Fox, Universal and Warner Bros.

So after 25 years working for the major studios, I knew that I was very experienced and highly knowledgeable about certain aspects of the motion picture and television industries, but I did not think of myself as an “expert” on whose word courts should rely.

That was, anyway, until shortly after leaving Paramount, I started receiving phone calls from other studios involved in one form of litigation or another that were looking for someone who could qualify as an expert and would be willing to render an opinion and possibly testify in court in their litigation. Each one was certain that based on my 25 years of experience in motion picture and television industry business affairs (including all forms of licensing, sales, distribution and acquisition transactions), I would qualify as an ”expert.”

Malcolm Gladwell wrote about the 10,000 hour rule in this book “Outliers.” This rule states that it requires at least 10,000 hours of practice to become an expert in a particular field. I figured that my 25 years of practice in one industry, at a minimum of 40 hours per week, equates to about 50,000 hours that I had practiced in motion picture and television business affairs. Maybe these people were right. As it turns out, my qualifications as an “expert” in multiple cases have never been successfully challenged. That may, in part, be attributed to the fact that I have always been very selective in choosing which matters I offered my services for—I stick with what I truly know.

One of the more interesting cases on which I provided services as an expert witness involved the classic motion picture, “The Exorcist.” The case was before the U.S. District Court for the Central District of California.

For those that don’t know, “The Exorcist” is the 1973 Warner Bros. release which, for many years, was the highest box office grossing horror motion picture of all time. In fact, adjusted for inflation “The Exorcist” is probably still the highest box office grossing horror motion picture of all time. It is certainly in the top five. If you haven’t seen it, you should.

Film finance can be complicated and there are typically investors that put up money or creative services for the film, alongside a studio and others, and, in exchange, they receive a contractual right to participate in the profits of the particular film. These are commonly known as participation agreements.

As often happens in Hollywood, claims were made against Warner Bros., the distributor of “The Exorcist” by a party who has a right to participate in the profits of the film. Basically, the claim was that Warner Bros. had not been properly exploiting “The Exorcist” in subsequent media and therefore the film’s gross revenue and profits were less than they otherwise could have been.

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Author: Jarod Bona

Selling a product or service when there is little to no competition is a great way to get rich. An economist might call some of those profits “monopoly rents.” With less or no competition, the amount supplied usually diminishes and the price goes up. The purchasers in this scenario lose and the supplier wins.

That is why companies, individuals and governments (yes, governments) violate the antitrust laws—it is good money.

Let’s say you run a municipality and money is tight. You could raise taxes, but that is a hassle because people hate taxes (understandably). You don’t want to cut spending or services because that might make re-election more difficult and will anger the lobbyists. You could spend your money more efficiently, but—oh yeah—you are part of the government. That probably won’t work.

Discouraged, you pack up and fly to the next convention of municipal bureaucrats in a sunny, expensive location. Probably somewhere in California. After a day or two of panels on replacing intersections with roundabouts and other riveting ideas, you are starting to perk up. Maybe it is the sun. Or maybe it is the conversation you just had with another municipal leader from a different state.

You were complaining about your budget at the municipal-budget support group session and this municipal leader from, let’s say, Virginia, told you about a brilliant money-making scheme for your municipality.

With a new-found energy, you fly back home and begin to implement it.

Here’s the brilliant idea: You leverage your government power to force a monopoly for the municipality. So the municipality will go into business, but doesn’t have to compete like every other business. You get the monopoly rents (money, money, money). The citizens who have to purchase your product or service—maybe garbage collection—lose because they will have to pay more. But it doesn’t look like a tax, even though it is really a hidden tax.

How many citizens will draw out supply and demand curves and loudly protest when they see that their “consumer surplus” is changed into “monopoly rents” for you? Only the economists and antitrust attorneys would do that and you’ve already convinced them to move away long ago.

This is fiction, of course. You probably don’t really run a municipality and you hopefully haven’t implemented an anticompetitive scheme to enrich your government entity.

But this happens all the time. Bona Law receives many calls from businesses that want to compete, but get shoved out of a market because a government entity wants to enrich itself. In practice, what often happens is a local government entity will pick a private-entity partner to implement the business with the product or service and the public and private entities will split the monopoly rents, to the detriment of the taxpayers and potential competitors.

This is a consistent problem and as you read the narrative, you can see why: It is a great way to get rich. Municipalities need money and will often use their regulatory power to assure that their market participation (or partner) remains free from competition.

A regular business couldn’t, of course, get away with this—they would be sued under the antitrust laws or face FTC or DOJ antitrust investigations and actions.

But can the local government get away with this corrupt, hidden tax that hurts competition and enlarges their own coffers?

Well, it depends.

Unfortunately, they get away with it all too often.

The federal antitrust laws do, fortunately, apply to local government entities, but they have a limited exemption called the state-action immunity. We’ve written about that a lot, so I won’t go into the details here. But, in some limited circumstances, courts will allow them to effectively steal money by removing competition from markets in which they compete.

Can you tell what side we take in these cases?

Anyway, there is an easier solution. And you can help.

A few years ago, in a case called FTC v. Phoebe Putney Health Systems, Inc., the US Supreme Court addressed an argument by the National Federation of Independent Business, as amicus, requesting the Court to apply what is called the market-participant exception to state-action immunity. That exception states that a government entity that is acting as a market-participant or commercial player in a market should not have the right to invoke state-action immunity from antitrust liability. If they are competing in a market, they should have to play by the same rules as the other competitors. And that includes following the antitrust laws.

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Author: Aaron Gott

If you haven’t been told you need a strong antitrust compliance program, then you probably haven’t spent much time with an antitrust lawyer. But it’s true: a strong antitrust compliance program will benefit your company in myriad ways.

The U.S. Department of Justice Antitrust Division recently announced it will consider an effective antitrust compliance program as a factor in deciding whether to charge a company with a criminal antitrust violation. An antitrust compliance program can also help prevent your company from violating the antitrust laws in the first place and, hopefully, avoid an antitrust blizzard. But if it doesn’t, it can still give you a leg up in the race for leniency by ensuring prompt detection and internal reporting, earn the company points for sentencing reductions, and reduce the amount it pays in fines.

The key here, though, is that it must be an effective antitrust compliance program. Effective doesn’t mean perfect—after all, DOJ wouldn’t be making a charging decision if a perfect program were in place—but it does mean that it should be well-designed, applied in good faith, and it should actually work.

In practice, that means your antitrust compliance program should:

  1. Identify, assess, and define the likely antitrust risks in the company’s line of business

The first step in any risk management process is, of course, to determine and assess those risks. Your antitrust lawyer should look closely at all aspects of your operations:

  • The jurisdictions in which you operate
  • Your industry sectors and the markets in which you compete
  • Competition, concentration, and barriers to entry in those markets
  • Your regulatory landscape
  • Your existing and potential customers and business partners
  • Your supply and distribution chains
  • Your business transactions
  • The extent to which you use third parties in your business
  • Your involvement in trade associations and joint ventures
  • Your culture and climate
  • Your past antitrust issues

As part of this process, the company should identify leaders most knowledgeable about these various aspects of the business and have them take the time to thoroughly educate antitrust counsel.

  1. Be designed to detect and manage those risks

It should go without saying that your compliance program won’t be effective unless it is tailored to manage the antitrust risks the company is most likely to face. There is no effective off-the-shelf antitrust compliance program.

Company leadership should be consulted and involved in the crafting of your antitrust compliance program. You should consider the company’s past successes and failures in other areas of compliance, reporting, and risk management, and work directly with your antitrust lawyer to implement processes and techniques that proved successful in other contexts.

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Author:  Aaron Gott

The federal antitrust laws are a decisive proclamation that competition is the best policy—competition leads to better products and services, the greatest value at the lowest price. But, just like with anything else, there are exceptions. Congress and the courts have carved out numerous exceptions from antitrust liability—or as we’ll call them, exemptions. There’s an insurance exemption, a labor exemption, a baseball exemption, a state-action exemption, and many others. And they exist for a variety of reasons. Without the labor exemption, for example, union activity would be a felony. And we have a baseball exemption because, well, America likes baseball.

Today we’re going to talk about one important exemption for the agriculture industry: the farm cooperative exemption. Created by the Capper-Volstead Co-operative Marketing Associations Act (7 U.S.C. §§ 291–92), the farm cooperative exemption provides associations of persons or entities who produce agricultural products a limited exemption from antitrust liability relating to the production, handling, and marketing of farm products.

The farm cooperative exemption has some personal significance to me: I grew up across the street from one in my small Iowa town. And that co-op sponsored one of my little league teams.

At Bona Law, we regularly deal with antitrust exemptions. In fact, we have argued state-action exemption issues before the U.S. Supreme Court several times. As with any other exemption—and this is very important—the farm cooperative exemption is limited, disfavored, and narrowly applied. So it can easily become a trap. Like anything with antitrust, there are plenty of nuances and exceptions. We’re going to address some of those, but you should contact an antitrust lawyer if you really need to know whether the antitrust laws could apply, you’re being sued, or you want to consider suing.

The farm cooperative exemption allows a group of farmers—each of which is a competitor in the market—to come together and essentially act as one farmer. Through a cooperative, farmers pool their output together, agree on a price, and ultimately have more bargaining power in dealing with buyers—who historically were much bigger outfits than the individual farmers competing for their business.

The exemption also allows cooperatives to join together under a common marketing agency.

The exemption is overseen by the USDA, and the act gives direct oversight power to the Secretary of Agriculture. The secretary can, on his own volition, hold hearings, find facts, and issue orders to prevent cooperatives from monopolizing or restraining trade “to such an extent that the price of any agricultural product is unduly enhanced” as a result. But litigation—whether enforcement by the Department of Justice Antitrust Division or private civil lawsuits—is where a cooperative’s fate is usually decided.

Without the exemption, this sort of arrangement would be analytically indistinguishable from a price-fixing cartel, except that price-fixing cartels typically do not operate out in the open, since it is a serious felony. In fact, before 1922 when the act went into effect, farmers who acted together to market their products were sometimes prosecuted under the Sherman Act.

Conditions for the Antitrust Exemption

The Capper-Volstead Act establishes several conditions for the exemption to apply. There are two universal conditions:

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Author: Luke Hasskamp

This is the second of a series of articles examining some of the interesting intersections between the law and baseball, with a focus on baseball’s exemption from federal and state antitrust laws. (Though, like the first article, this one does not quite reach the antitrust issues, as the initial challenges were brought under contract law.)

The first article looked at some of the early conflict between professional baseball players and team owners of the National League, which largely originated from the owners’ adoption of the “reserve clause,” which effectively tied a player to a single team for the entirety of his career, subject to the team’s discretion (and ten-days’ notice). Naturally, this led to litigation, particularly as other leagues emerged that sought to compete with the National League. The National League sued several players who tried to jump to the Players League—and the players won resounding victories in those early cases, with courts refusing to find the one-sided contracts to be enforceable on the ground that they were indefinite agreements and/or lacked mutuality.

[The third article is Baseball Reaches the Supreme Court.]

Thus, by the time the 1890 season ended—with the National League champion Brooklyn Bridegrooms and the American Association champion Louisville Colonels participating in a best-of-seven game “world” series that ended in a tie—it seemed that the reserve clause was doomed. But forces conspired to give the teams, yet again, the upper hand.

To begin, the Players League ended its first season as a financial failure, causing the League to disband. This relieved the National League of a major competitor. The National League received more good news following the 1891 season, when the American Association, another professional league, failed. This meant that, once again, there was only one professional league in town. Thus, even though the players had won important cases invalidating the reserve clause, they had nowhere else to play, which would remain the case for the next decade.

Things got a little more interesting in 1901 with the arrival of the American League, which emerged as a serious competitor. Indeed, the National League had instituted a per player salary cap of $2,400, while the American League offered salaries of up to $6,000, causing dozens of players to switch leagues.

One such player was Napoleon “Nap” Lajoie, a star player for the National League’s Philadelphia Phillies. Indeed, Lajoie was one of the first superstars of the game and was highly sought by the upstart American League. (Indeed, he refused to take a bad photo.) Despite his contract with the National League, Lajoie signed with the new American League team in town: the Philadelphia Athletics (which was to be managed by Connie Mack, who remained the manager of the Athletics for an incredible 50 years—the longest-serving manager in Major League Baseball history—amassing records for wins (3,731), losses (3,948), and games managed (7,755)).

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Author: Luke Hasskamp

This is the first of a series of articles intended to address some of the interesting intersections between the law and baseball, particularly baseball’s curious exemption from federal and state antitrust laws. More generally, it’s about the struggle between team owners and players since the dawn of professional baseball, and some of the quirks to emerge along the way.

You can read the second part of the baseball and antitrust series here: The Owners Strike Back (And Strike Out).

The third part of the series is Baseball Reaches the Supreme Court.

This article starts at the beginning with a fledgling set of teams in the National League in the late 19th century—with team owners trying to turn consistent profits and players beginning to emerge as stars, and the tension between the two.

The trouble started in 1879, when the owners of the teams in the National League agreed on the “reserve clause” which was a provision included in player contracts that effectively bound the player to his team for his entire career. (Here’s an example of such a reserve clause.)

At the time, most National League teams were losing money and faced bleak financial prospects. To curb expenses, the teams agreed on a strategy to keep salaries down: each team would be allowed to “reserve” up to five players for the following season. This meant that no other team could sign a reserved player unless he received permission to do so.

As expected, each team elected to reserve their five best players, i.e., their most expensive players. With no market competing for players’ services, team owners were able to suppress salaries for elite talent and increase profits. Indeed, just two seasons after the adoptions of the reserve clause, most teams had become profitable, the first time that had happened.

 Due to this success, the owners saw no reason to limit the reserve clause to the top five players. They steadily increased the reserve limit until, by 1887, a team was permitted to reserve its entire roster, 14 players at the time. 1887 is also the year that the reserve clause became an explicit provision in players’ contracts; until then, it had at first been a secret agreement between the owners and then, after it leaked, simply become a league rule that all players were required to abide by. Importantly (for the owners), the reserve clause crept beyond the National League into other competing leagues that would emerge during that time, including the American Association and the American League, which both agreed to honor National League’s reserve lists.

At this time, the contracts were decidedly one sided. Although teams effectively controlled a player for the entirety of his career, nothing bound the teams to their players, except for their contracts (and virtually all contracts had one-year terms). Any player could be traded or sold at any time, and they could be released on just 10-days’ notice.

John Montgomery Ward became an important early figure in challenges to baseball’s reserve clause. Known as Monte Ward during his playing days, he began his career at 19 as a pitcher for the Providence Grays. In 1879, he went 47–19 with 239 strikeouts and a 2.15 ERA, pitching 587 innings. The following season Ward went 39–24 with 230 strikeouts and a 1.74 ERA pitching 595.0 innings. Ward also has the distinction of pitching the second perfect game in professional history as well as the longest complete game shutout, going 18 innings in a 1-0 win over the Detroit Wolverines 1–0 on August 17, 1882, a record that will never be broken. (He also has a pretty epic baseball card.)

Following an injury to his pitching arm that, remarkably, was not attributed to his workload but to a mishap while sliding, Ward’s performance as a pitcher began to diminish, so the Grays sold him to the New York Gotham before the 1883 season (they were renamed the New York Giants in 1885.) The move was fortuitous for several reasons, including the fact that it enabled Ward to enroll at Columbia Law School, where he graduated in 1885.

Using his legal training, Ward organized and led the first labor union in professional sports, the Brotherhood of Professional Baseball Players. The principal goal of the Brotherhood was to raise player salaries, which had remained stagnant even though baseball’s popularity (and revenues) had risen considerably. A chief target of the Brotherhood’s effort was the reserve clause, which continued to suppress players’ salaries and limit their mobility.

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As a regular reader of The Antitrust Attorney Blog, you understand that setting prices or allocating markets with your competitor is a terrible idea. Doing so is likely to lead to civil litigation and perhaps even criminal penalties.

Price fixing and market allocation agreements are per se antitrust violations. That means they are the worst of the worst of anticompetitive conduct.

There is, however, a limited circumstance in which what would normally be a per se antitrust violation is instead treated by Courts and government antitrust agencies under the rule of reason:

An ancillary restraint.

You shouldn’t put ancillary restraints in your agreements without the help of an antitrust lawyer. That would be like juggling knives that are on fire. You might be able to do it, but if you make a mistake, you won’t like the results.

What is an Ancillary Restraint?

This isn’t an easy question to answer and, in fact, if you can answer it, you will often know whether your restraint will survive antitrust scrutiny.

Let’s back up a little bit.

In a typical situation, if two competitors agree to fix prices or to split a market (perhaps they will agree to limit their competition for each other’s customers), they commit what is called a per se antitrust violation. What that means is that this type of restraint is so consistently anticompetitive that courts won’t even examine the circumstances—it is per se illegal.

Obviously you should avoid committing per se antitrust violations, unless, of course, you want to experience an antitrust blizzard.

Without further context, such a restraint is often called a naked restraint of trade. That doesn’t mean that the cartel meets at a nudist colony; it means that it is an anticompetitive agreement with nothing surrounding it. Such agreements are almost always done to gain greater profits from the restraint itself.

So what does a non-naked restraint of trade look like? Interesting question. I will answer it, but you have to read through most of this article.

Sometimes two or more parties, even competitors, will put together a joint venture or collaboration that creates what antitrust lawyers often call efficiency. You might normally think of efficiency as running more smoothly or at the same or better result with fewer resources.

But when antitrust attorneys use the term “efficiency” or “efficiency enhancing,” they often mean that the venture or combination will create economic value for the marketplace as a whole that wouldn’t exist but for the agreement. The term often comes up in the merger context, as an antitrust analysis of a merger will examine whether the benefits through efficiency and more exceed any potential anticompetitive harm.

An Ancillary Restraint Example

Sometimes it is easier to understand with an example: Let’s say you have a company called Research that is full of people with PhDs that spend all of their days trying to figure out how to make the world a better place. If someone at Research comes up with a good idea, the company will sometimes manufacture and sell the finished product itself.

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Author: Jarod Bona

Thanks to a 1977 US Supreme Court case called Illinois Brick v. Illinois, class-action-antitrust plaintiff claims may look strange.

You might expect to see named plaintiffs for a class of allegedly injured parties suing defendants (and it is usually multiple defendants) under the federal antitrust laws for damages. And you do see that—those are usually called the “direct purchasers.”

But what is unexpected is that you also often see another separate group of putative class members suing for the same alleged anticompetitive conduct in the same federal court, except they are suing under state antitrust laws—but only some state antitrust laws—for damages. These are usually called the “indirect purchasers.”

(The indirect purchasers also often sue for injunctive relief under federal antitrust law.).

This doesn’t seem to make much sense. What is going on here?

Good question.

I’ll do my best to explain.

But first, I want to remind you that even though Bona Law represents both plaintiffs and defendants in antitrust litigation, we do not typically represent class action plaintiffs in antitrust cases, and in fact, represent defendants in antitrust class actions. Indeed, this has been a large part of my career, going back to my time at Gibson, Dunn and DLA Piper. So—for that reason—I may be biased on these plaintiff antitrust class action v. defendant issues. That bias could seep into my description and explanations below.

Let’s use an antitrust price-fixing case to illustrate how this works (as many large antitrust class action cases involve price-fixing anyway):

So let’s say that the world figures out that the Antitrust Division of the Department of Justice is investigating three companies, making up an industry, for price-fixing. How did the world figure that out? Well, maybe DOJ obtained criminal indictments or a public company had to make note of it in its SEC filing?

You will then often see a blizzard of antitrust filings in federal courts throughout the country by an industry of antitrust class action plaintiff lawyers. As described above, some of these will be for direct purchasers and some for indirect purchasers.

Simply stated, a direct purchaser is someone that purchased a product directly from a defendant. An indirect purchaser is someone that purchased the product that came from a defendant, but not directly—instead, through some intermediary like a retailer or distributor.

If both direct purchasers and indirect purchasers are part of the same lawsuit or suing a single group of defendants under the same claim, there is this sticky question of, even conceding that there was price-fixing, who was damaged and by how much? That is, the price-fixing may have increased the prices that the direct purchasers literally paid compared to the but-for world without price-fixing, but what if the direct purchasers were retailers or distributors that merely passed along all or some of that overcharge to people that purchased from them (i.e. indirect purchasers)? Then the direct purchasers weren’t really injured or their damages were less than the amount of the overcharge from defendants’ price fixing.

What do you do with that?

Well, in 1968, the Supreme Court in Hanover Shoe, Inc. v. United Shoe Machinery Corp. said you had to ignore that problem. That is, the Supreme Court forbid antitrust defendants from raising as a defense that the direct purchasers had passed on any overcharge.

Okay, well, sometimes if you ignore a problem, it will go away.

But then indirect purchasers began suing under the federal antitrust laws and defendants were thus potentially subject to paying damages twice: Once to direct purchasers that had passed on overcharges (they couldn’t use that as a defense) and a second time to indirect purchasers who had received the overcharge from direct purchasers.

This hardly seemed fair, so the United States Supreme Court in the classic case of Illinois Brick v. Illinois decided in 1977 to put a stop to it: Henceforth, indirect purchasers could no longer sue for damages under the federal antitrust laws. So—again—the Supreme Court essentially said that we were just going to ignore the problem of pass-through from direct purchasers to indirect purchasers.

The Illinois Brick Court actually described three primary reasons for refusing to allow indirect purchaser suits for damages under the federal antitrust laws. First, doing so would allow for more effective enforcement of the antitrust laws (as splitting rewards for the overcharge among two different classes might dilute incentives of one or the other to file federal antitrust claims). Second, prohibiting indirect purchaser federal antitrust claims would avoid complicated damages calculations. And finally, allowing both direct and indirect purchaser federal antitrust claims would create the potential for duplicative damages against defendants.

Maybe now the problem would go away?

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