Articles Posted in Sports and Entertainment Law

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Authors: Luke Hasskamp and Molly Donovan

We often write about sports and antitrust and have previously written about professional golf, and, specifically, the legal implications of a competitor golf league trying to break onto the scene:

The new league, LIV Golf, seeks to compete with the PGA Tour, as well as the European tour (known as the DP World Tour). Indeed, LIV Golf held its first event this past weekend in London, which included 48 participants. Of those, 17 players were members of the PGA Tour. Charl Schwartzel emerged as the winner of the “richest tournament in golf history,” taking home $4.75 million in prize money, which was more than he won during the last four years combined.

In response, the PGA Tour handed down harsh discipline to those 17 players who joined LIV Golf, suspending them indefinitely. The PGA Tour also promised to suspend any other players that participate in future LIV Golf events. It’s a dramatic step, and surely not the last word on the matter.

Now, let’s say you’re one of those 17 players who has been suspended, or you’re a member of the PGA Tour considering playing for LIV Golf but you’re facing such a ban. There are many things to consider, of course. But let’s focus on your legal options. Would the PGA Tour’s ban of a player that chooses to participate in a competitor’s event be lawful? Do the federal antitrust laws in the United States provide you any remedies? Potentially. Let’s take a closer look.

Section 2 of the Sherman Act – Monopolization

Federal antitrust laws make it illegal for a monopolist to preserve its dominant market position through anticompetitive conduct. Here, the PGA Tour sure looks like a monopoly. It’s the dominant actor in the professional golf market in the United States, with revenues well exceeding $1 billion per year. If you are an elite professional golfer in the United States, it’s pretty much the only place to play. (Actually, the PGA Tour, in this context, looks more like a monopsony, as it’s the dominant purchaser of labor in the professional golf market.)

But being a monopoly is not illegal by itself. Instead, there must be some anticompetitive or exclusionary conduct that harms competition in the market.

Typical examples of procompetitive conduct include lowering prices, improving quality, enhancing services, or, in the labor market, raising wages and improving benefits. Antitrust laws like these types of behavior because they enhance competition and are good for consumers. A monopoly that holds onto its dominant market position by offering the lowest prices and the best product is generally a good thing and something antitrust laws seek to encourage. Similarly, a monopsony employer that attracts and retains the best employees by paying the highest wages, offering the best benefits, and otherwise creating the most attractive work environment is the type of outcome that is perfectly acceptable from an antitrust perspective.

Anticompetitive conduct can be harder to define, but can include things like threatening customers or employees, an exclusionary boycott, bundling, tying, exclusive dealing, disparagement, sham litigation, tortious misconduct, and fraud. We’re looking for improper attempts by a monopolist to box out a competitor.

When we look at the current PGA Tour dispute and its decision to suspend players who play for LIV Golf, it seems at least arguable that the PGA Tour’s conduct is anticompetitive. They are not attempting to retain the best golfers by raising compensation, creating more opportunities, or otherwise enhancing the work environment for its players. Instead, the PGA Tour is punishing players who choose to participate in a rival’s events. The conduct appears designed to stifle a would-be competitor.

Section 1 of the Sherman Act – Agreements

Federal antitrust laws also analyze agreements by two or more parties that restrain trade in the market. And agreements between horizontal competitors are closely scrutinized under the per se standard.

Consider professional baseball’s long and storied antitrust history. Those antitrust disputes started (more than 100 years ago) because teams had collectively agreed not to sign each other’s players. Back then, baseball contracts included a “reserve clause,” which reserved a team’s right to a player in perpetuity. Thus, once a player signed with that team, he was only able to re-sign in following years with that same team (unless the team released him). All teams agreed to honor each other’s reserve clauses by agreeing to not sign another team’s players, even if his contract had expired. The reserve clause intentionally suppressed competition by, in essence, preventing free agency. It suppressed players’ salaries. With only one team competing for a player’s services, rather than a full league, teams avoided bidding wars and players had little recourse but to accept the amount offered by their team.

Here, we’d ask whether the PGA Tour has entered into any agreements (formal or otherwise) with another party that restrain trade in the market for professional golf services. There is at least some indicia of such agreements. The European tour (the DP World Tour) has hinted that it may follow the PGA Tour’s approach to dealing with members would participate in LIV Golf. This may stem from the PGA Tour’s “strategic alliance” with the DP World Tour. This sure looks like it could be a horizontal agreement between competitors. Other entities may also be considering similar agreements with the PGA Tour, including the PGA of America, which runs the PGA Championship, one of golf’s four majors, as well as the Ryder Cup, a wildly popular team competition between players from the United States and Europe. The PGA of America, a separate entity from the PGA Tour, has suggested that it is likely to not permit LIV Golf players to participate in the PGA Championship or Ryder Cup.

Of course, sometimes competitors will follow each other’s policies, prices, or practices without an agreement of any sort. That is called conscious parallelism and is not an agreement in restraint of trade because there is no agreement. We don’t know whether there is an agreement here or the European Tour is merely following the PGA Tour in a round of conscious parallelism.

Remedies

A plaintiff prevailing on an antitrust claim has a right to treble damages, which is three times their actual damages, as well as attorney fees.

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Author: Luke Hasskamp

Hello, friends. Let’s talk about some of the latest developments in the world of professional golf, at least from an antitrust perspective.

Last spring I wrote about the PGA Tour’s response to a potential competitor golf league. The new league promised to shake up professional golf, guaranteeing massive payouts to attract some of the top players in the game and offering unique competitions and tournament formats different from the standard PGA Tour event.

As with many upstart competitors, the new league generated a great deal of controversy. By far, the most controversial aspect is the league’s association with Saudi Arabia. Indeed, the league is mostly funded by the Saudi Arabia government not a golf hotbed. Saudi Arabia’s investments have been criticized as “sportswashing,”—“the practice of investing or hosting sporting events in a bid to obscure the Kingdom’s poor human rights record, and tout itself as a new leading global venue for tourism and events.”

This upstart league has gone through a few iterations and, with it, a few different names. Last spring it was referred to the Premier Golf League, and it has also been called the Super Golf League. The current moniker appears to be LIV Golf. (We’re excited to see what name they come up with next!)

Reports suggested that individual players were being offered substantial sums of money, upwards of nine-figure deals, simply to join the LIV league—including a reported $125 million offered to Dustin Johnson, the most prominent player to announce his intention to play in the LIV league. To put that in perspective, Tiger Woods is the all-time career money leader with $120 million (and only one other player has ever won more than $75 million all time (Phil Mickelson, $92 million).

My last article speculated on whether other actors would join the PGA Tour’s efforts to squelch the upstart league. Well, at least one partner said it would enforce the PGA Tour’s ban. The PGA of America (a separate entity from the PGA Tour) announced that anyone banned from the PGA Tour would also be barred from competing in the PGA Championship (one of golf’s four majors), as well as the biennial Ryder Cup. “If someone wants to play on a Ryder Cup for the U.S., they’re going to need to be a member of the PGA of America, and they get that membership through being a member of the Tour,” PGA of America CEO Seth Waugh said last May.

Waugh added that “the Europeans feel the same way,” suggesting the European tour would also enforce the PGA Tour’s ban at its events. And, indeed, the European tour (the DP World Tour) later issued a “warning memo” to its members against participating in LIV events. And, just recently, the United States Golf Association—the organization that hosts the U.S. Open, one of golf’s four majors—announced that “although the USGA ‘prides themselves on the openness of their tournament,’ they will also make their own decision about the eligibility of players at the upcoming U.S. Open . . . on a case-by-case basis.” This appears to be another not so subtle attempt at dissuading golfers from jumping to the Saudi league.

Along those lines, Phil Mickelson was not a participant at this year’s Masters tournament. Mickelson, as a past champion, has a standing invitation to play in the Masters, part of the tournament’s storied tradition. There was speculation that Masters officials instructed Mickelson not to attend the tournament due to the controversy. But Masters officials denied the report, stating that Mickelson decided not to participate in this year’s event. (Mickelson has not commented publicly on the specifics.) Mickelson also did not participate in this year’s PGA Championship, another major and one where Mickelson was the defending champion.

Sponsors also appear to be siding with the PGA Tour (or, perhaps, simply do not wish to align themselves with LIV and its Saudi connections). RBC announced that it was dropping its sponsorship deals with Dustin Johnson and Graeme McDowell after both golfers were linked to the Saudi league. Similarly, UPS dropped its deals with Lee Westwood and Louis Oosthuizen.

This all comes on the heels of the latest development: the LIV league’s first event is coming to fruition. It is scheduled for June 9-11 in London, at the same time as the PGA Tour’s RBC Canadian Open event. Because these are conflicting events, PGA Tour members needed to obtain express permission from the PGA Tour to participate. But the Tour rejected all requests for an exemption (as did the European tour). But several dozen players announced that they were in the field for the LIV event, a surprising number for an league that seemed on more than one occasion as if it would never get off the ground. (Interestingly, Phil Mickelson has not announced whether he will participate, and he was not listed as one of the 48 participants, although six spots were unannounced so it’s possible he’ll still be in the field.)

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Author: Luke Hasskamp

It’s one of the best times of the year—opening day in Major League Baseball!

Now, there has been a lot of professional baseball news lately, with the MLB lockout and acrimonious negotiations between the MLB players union and team owners, before they finally resolved the dispute and got back to baseball. But somewhat lost in the hubbub has been a dispute between MLB and several minor league baseball teams that has been in the works for years.

Specifically, four minor league teams have sued MLB under federal antitrust laws, alleging MLB unlawfully conspired to eliminate 40 minor league affiliates in violation of Section 1 of the Sherman Act.

Those teams (the Staten Island Yankees, the Tri-City Valley Cats, the Salem-Keizer Volcanoes, and the Norwich Sea Unicorns) were among the 40 teams that MLB stripped of their affiliations in major league clubs. This followed a plan announced in 2020 by MLB to reduce the number of affiliated minor league teams from 160 to 120. MLB’s move was, unsurprisingly, highly criticized by the teams, as well as their communities and political representatives.

In the lawsuit, the four minor league teams accused MLB’s actions as “nothing less than a naked, horizontal agreement to cement MLB’s dominance over all professional baseball and to reduce output and boycott” the 40 teams stripped of their MLB affiliation.

What is interesting about the lawsuit is that the four minor league teams expressly acknowledge that their claim is currently barred by existing Supreme Court precedent—baseball’s antitrust exemption that emerged 100 years ago, in the Supreme Court’s 1922 decision in Federal Baseball Club v. National League, 259 U.S. 200 (1922). (We have written a series of articles about baseball’s antitrust exemption which detailed the history of baseball and its legal disputes over the decades.)

In essence, in Federal Baseball Club, the Supreme Court held that federal antitrust laws do not apply to the game of baseball. That now notorious decision, written by Justice Oliver Wendell Holmes, Jr., consisted of just three paragraphs of reasoning. The Court’s ultimate reasoning: the Sherman Act did not apply because baseball did not have an impact on interstate commerce: “The business is giving exhibitions of baseball, which are purely state affairs.” The Court reasoned that, even if individuals did cross state lines for baseball games, “the transport is a mere incident, not the essential thing.” According to the Court, “personal effort not related to production is not a subject of commerce. That which in its consummation is not commerce does not become commerce among the states because the transportation that we have mentioned takes place.”

(Notably, this year marks the centennial anniversary of baseball’s antitrust exemption as Federal Baseball Club was decided 100 years ago, on May 29, 1922.)

Now, when we wrote our articles about 18 months before this one, we anticipated future disputes specifically between MLB and minor league teams. We noted, “[i] n 1998, Congress enacted the Curt Flood Act of 1998, which declared that the antitrust laws apply to Major League Baseball’s employment practices . . . . An interesting aspect of the law, however, was that only Major League Baseball players were given standing to sue—minor league [players and teams] remain subject to the reserve clause, which is an interesting wrinkle . . . .”

That “interesting wrinkle” became the full-blown lawsuit in December 2021 filed by these four minor league teams in the Southern District of New York. As we said, the minor league teams recognized the significant impediment that the Federal Baseball Club precedent created. They are asserting a federal antitrust claim against MLB, and the Supreme Court has exempted major league baseball from such claims. But the minor league teams insist that the Supreme Court is primed for a change of course. Indeed, they suggest that the Supreme Court’s recent antitrust ruling in NCAA v. Alston, 141 S. Ct. 2141 (2021), portends a likely reversal of the baseball exemption if the issue again reaches the Court.

Alston was a high-profile dispute between the NCAA and several college athletes challenging NCAA compensation restrictions under antitrust laws. The NCAA had tried to overcome the lawsuit by arguing it too was entitled to a similar protection from antitrust scrutiny that baseball enjoyed, at least for its amateurism rules, stemming from a nearly 40-year-old decision in NCAA v. Board of Regents, 468 U.S. 85 (1984). But, in Alston, the Supreme Court unanimously rejected that argument, concluding that whatever special protection from the antitrust laws that the Board of Regents decision had provided to the NCAA no longer applied.

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Author:  Steven J. Cernak[1]

On June 21, 2021, the U.S. Supreme Court affirmed lower court decisions and held that certain NCAA restrictions on educational benefits for student-athletes violated Sherman Act Section 1.  The unanimous opinion was a clear win for the plaintiff class and almost certainly will lead to big changes in college sports.

It was also a clear defeat for the NCAA. While the opinion (as the NCAA’s reaction emphasized) maintained the NCAA’s ability to prohibit non-educational benefits and define limits on educational ones, any such NCAA rules must be defended under a full antitrust rule of reason analysis, not a special deferential standard based on language from a 1984 Supreme Court case. Litigation on such issues is already in the lower courts and more can now be expected.

Justice Gorsuch’s unanimous opinion for the Court, however, contains numerous references, concepts, and phrases that will prove helpful to future antitrust defendants, especially those in joint ventures with competitors. The opinion is a reminder that any effort to aggressively change antitrust’s status quo will need to deal with a judiciary steeped in decades’ worth of precedent.  Below are some highlights of the opinion sure to be noted by future antitrust defendants.

American Express, Trinko Alive and Well 

The recent House Majority Report on antitrust issues in Big Tech, co-authored by recently confirmed FTC Commissioner Lina Khan, had several general recommendations. One of those recommendations was for Congress to overturn several Court antitrust opinions, including Ohio v. American Express (written by Justice Thomas) and Verizon v. Trinko (written by Justice Scalia). We covered the ramifications of such reversals here and here.

Apparently, the Court disagrees with that recommendation. American Express was cited at least seven times by the Court, both for when the rule of reason analysis should be used and the three-part burden-shifting process of such an analysis. In a heavily criticized part of the American Express opinion, the Court found that the rule of reason analysis needed to account for effects on both sides of a two-sided market. While Justice Gorsuch’s opinion here did not cite American Express for that proposition, it and the parties assumed that the NCAA could try to justify its restraints in the labor or input market with positive effects in the output market, further cementing the American Express analysis.

The opinion cites Trinko at least four times, usually for the proposition that judges should not impose remedies that attempt to “micromanage” a company’s business by setting prices and similar details. Another citation, however, is to Trinko’s admonition to courts to avoid “mistaken condemnations of legitimate business arrangements” that could chill the procompetitive conduct the antitrust laws are designed to protect. This focus on “error costs” has been embedded in antitrust jurisprudence for decades but has come under attack in recent years from commentators who would prefer more aggressive antitrust enforcement. This unanimous opinion ignores that criticism.

Bork and Easterbrook

Many of today’s antitrust principles can be attributed to Chicago School theorists, including Robert Bork and Frank Easterbrook. Their writings, both as academics and appellate court judges, have remained influential, although both recently have come under withering attack.  Justice Gorsuch seems to remain a fan of both.

Bork’s opinion in Rothery Storage v. Atlas Van Lines is cited twice, once for the proposition that the reasonableness of some actions can be judged quickly and once that courts should not require businesses to use the least restrictive means for achieving legitimate purposes. Bork’s recently re-released The Antitrust Paradox is also quoted for the proposition that competitors in sports leagues must be allowed to reach some agreements, such as on number of players, in order to have any competitions at all.

The Supreme Court cites two of Easterbrook’s Seventh Circuit opinions. The Court cites Polk Bros. v. Forest City Enterprises for the proposition that a joint venture among firms without the ability to reduce output is unlikely to harm consumers. A page later, the Court uses Chicago Professional Sports v. NBA to explain that different restraints among joint venturers might require different depths of analysis to ascertain their effect on competition. Finally, the Court cites one of his law review articles to support judicial caution in summarily condemning business conduct until courts and economists have accumulated sufficient understanding of its likely competitive effect. Surprisingly, Easterbrook’s most famous article — The Limits of Antitrust — was not used in the discussion of the error-cost framework discussed above, despite continuing to be celebrated as one of the leading descriptions of the concept.

Other Quotable Quotes

In addition to the citations above, several other portions of the opinion are sure to be used by future antitrust defendants. In fact, on June 21 Prof. Randy Picker (@randypicker) put together a Letterman-like Top 10 List of Things that Defense Attorneys will Like in Alston tweet thread.  No arguments here with any item on Prof. Picker’s list but two groups of such quotes are worth highlighting.

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Author: Jarod Bona

When you think about Sherman Act Section 1 antitrust cases (the ones involving conspiracies), you usually consider the question—often framed at the motion to dismiss stage as a Twombly inquiry—whether the defendants actually engaged in an antitrust conspiracy.

But, sometimes, the question is whether the defendants are, in fact, capable of conspiring together.

That isn’t a commentary on the intelligence or skills of any particular defendants, but a serious antitrust issue that can—in some instances—create complexity.

So far I’ve been somewhat opaque, so let me illustrate. Let’s say you want to sue a corporation under the antitrust laws, but can’t find another entity they’ve conspired with so you can invoke Section 1 of the Sherman Act (which requires a conspiracy or agreement). How about this: You allege that the corporation conspired with its President, Vice-President, and Treasurer to violate the antitrust laws. Can you do that?

Probably not. In the typical case, a corporation is not legally capable of conspiring with its own officers. The group is considered, for purposes of the antitrust laws, as a “single economic entity,” which is incapable of conspiring with itself. Of course, the situation is complicated if we aren’t talking about the typical corporate officers, but instead analyzing a case with a corporation and corporate agents (or in some cases, even employees) that are acting for their own self-interest and not as a true agent of the corporation. The question, often a complex one, will usually come down to whether there is sufficient separation of economic interests that the law can justify treating them as separate actors.

A lot of tricky issues can arise when dealing with companies and their subsidiaries as well. In the classic case, Copperweld Corp. v. Independence Tube Corporation, for example, the United States Supreme Court held that the coordinated activities of a parent and its wholly-owned subsidiary are a single enterprise (incapable of conspiring) for purposes of Section 1 of the Sherman Act.

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Author: Luke Hasskamp

Any time a dominant market player takes aggressive steps in the face of competition, that can catch people’s eye, especially those attuned to antitrust issues. That reality is true for the PGA Tour and its response to reports of efforts to launch a competitor golf league—the Premier Golf League.

For professional golfers and their fans, a pretty significant story broke this week about an upstart golf league seeking to get off the ground. The long-rumored Premier Golf League, or PGL, resurfaced, with the promise of upending professional golf across the globe. The PGL looks to attract some stars of the game with substantial, guaranteed contracts worth tens of millions of dollars, and massive payouts for each event, with a reported season-long payout total of one billion dollars.

Updates

1. Is Antitrust Litigation the Next Stop in the PGA Tour’s Battle with the Upstart LIV Golf League?

2. Is the PGA’s Suspension of 17 Players Out of Bounds Under the Federal Antitrust Laws?

In response to news about the PGL, the PGA Tour has taken several steps. The Tour started by introducing a so-called “Player Impact Fund,” which would award $40 million in annual bonuses to the top 10 players considered to drive fan and sponsor engagement, even if they’re not consistently winning. Unlike most earnings on Tour, these bonus payments would not be directly tied to a player’s performance during tournaments. This response seems like a legitimate and pro-competitive way to respond to market competition.

Perhaps more interestingly, the PGA Tour has also taken other, more aggressive steps in response to this potential competition. Specifically, PGA Tour commissioner Jay Monahan threatened the game’s top players with suspension or even permanent expulsion from the Tour if they sign on with a proposed Premier Golf League. The Tour has long required players to limit their participation in non-Tour events; indeed, it has required the Tour’s express permission. But this latest action has taken things to the next level.

Our antitrust ears perk up any time a company tells those associated with it that they’ll be permanently banned if they do business with a competitor. And it reminds us of parallels in the sports world, particularly with professional baseball. Indeed, baseball has a long history with antitrust and labor issues stemming from would-be competitors, such as bare-knuckle tactics, player suspensions, and extensive litigation, including multiple cases to reach the Supreme Court. We have detailed that saga in several articles:

Part 1: Baseball and the Reserve Clause.

Part 2: The Owners Strike Back (And Strike Out).

Part 3: Baseball Reaches the Supreme Court.

Part 4: Baseball’s Antitrust Exemption.

Part 5: Touch ’em all, Curt Flood.

In short, for decades, professional baseball thwarted competition and suppressed salaries in the face of direct antitrust challenges by preventing player free agency and punishing (i.e., banning) players who opted to play for other leagues. Baseball, of course, at least for now, has an exemption from antitrust liability.

Moreover, not only is it easy to argue that the PGA Tour is a monopoly whose conduct might implicate Section 2 of the Sherman Antitrust Act, but the PGA Tour also has relationships with other entities that could implicate Section 1 of the Sherman Act, which bars anticompetitive agreements.

To begin, the PGA Tour recently launched a “Strategic Alliance” with the European Tour, meant to enhance “collaboration on global scheduling, prize money and playing privileges for both tours’ memberships.” There are many pro-competitive reasons for such as alliance, but there is also no question that the potential competition from the Premier Golf League was a significant factor.

Moreover, the PGA Tour has relationships with many key market actors, including sponsors, media companies, and other interests that could further complicate these issues. For example, what if sponsors withdraw from endorsement deals with a player because of his decision to join the PGL? Does this suggest an unlawful group boycott?

Relatedly, there are key golf events—such as golf’s four annual majors and the Ryder Cup—that are not explicitly run by the PGA Tour but are tied to performance in Tour events. Indeed, success on the PGA and European Tours is the primary way players qualify for major events. What if those events agree not to allow PGL players to qualify? Or even more blatantly, what if those events revoke invitations to players who have already qualified (for example, winners of the Masters, Open Championship, and PGA Championship receive lifetime invitations)?

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Author: Jon Cieslak

Many guitarists and rock music fans have recently gotten to know Rick Beato. Beato is a musician, music producer, and, most recently, a YouTube personality. He regularly produces YouTube videos about a variety of music topics, headlined by his most well-known series, What Makes This Song Great?, which breaks down and discusses popular songs. He also occasionally discusses legal issues, particularly copyright law and fair use, as he has had videos removed from his YouTube channel.

In one video, Beato touches on antitrust law in his discussion of what he refers to as the Y2K curse. The Y2K curse refers to his observation that a large number of successful rock bands from the 1990s—Beato gives twenty eight examples, including Live, Cake, Counting Crows, Bush, Blur, Goo Goo Dolls, and Barenaked Ladies—“did nothing after the year 2000.” This is not because they stopped releasing albums; rather, their releases in the 2000s did not have the same commercial success. He admits that this was not a universal problem, as bands such as Foo Fighters, Green Day, Red Hot Chili Peppers, and Weezer were able to maintain their success.

So why did so many (but not all) rock bands suffer from the Y2K curse? Beato attributes much of it to a change in radio formats indirectly prompted by the Telecommunications Act of 1996. According to the FCC, the Act’s goal was “to let anyone enter any communications business—to let any communications business compete in any market against any other.” But what happened in practice was the drastic increase in the consolidation of media ownership, particularly in radio stations. As Beato explains, in 1983, 90% of American media was controlled by fifty companies. By 2011, 90% of American media was controlled by just six companies (GE, News-Corp, Disney, Viacom, Time Warner, and CBS). This consolidated media ownership resulted in “consolidated playlists” with far fewer “gatekeepers”—who are frequently now market researchers instead of DJs—deciding what music would be played on the radio. That smaller number of corporate gatekeepers, all concerned about offending the smallest number of potential listeners, resulted in less variety and eliminated the main outlet for many popular bands from the 1990s.

Assuming this is all true, would antitrust law provide a remedy for the loss of musical variety on the radio? After all, the goal of antitrust law is to prevent the ill effects of reduced competition.

Probably not. Antitrust law most likely would not provide a remedy because it generally does not recognize the loss of variety—without some associated detrimental effect on competition—as a cognizable anticompetitive harm.

This recalls an interesting debate among antitrust scholars about what “the primary concern of antitrust law” should be. Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 51 n.19 (1977). The prevailing view—which the Supreme Court spurred with its Continental T.V. decision—is that federal antitrust laws should promote economic welfare (frequently referred to as consumer welfare) over other goals. As a leading antitrust treatise says, “economic concerns have generally dominated antitrust policy and trumped competing ‘populist’ concerns.” 1 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 110 (5th ed. 2020). While the Supreme Court has never formally adopted the economic welfare standard—or any standard, for that matter—regulators, litigants, and courts frequently focus on price effects when evaluating alleged anticompetitive conduct. To be sure, those price effects should be based on quality-adjusted prices—i.e. prices that consider nonprice elements of a product that affect consumer preferences such as color, style, or brand reputation—but the economic welfare standard does not protect variety for variety’s sake.

Returning to Beato’s Y2K curse, application of the economic welfare standard would likely render antitrust law powerless to remedy the curse’s effects. The consolidation of media ownership and corresponding streamlining of radio playlists did not have the most common hallmarks of anticompetitive harm that courts usually consider. Prices for radio broadcasts did not go up. There was no substantial reduction in output of radio broadcasts. So unless a court was willing to find that the quality of radio broadcasts went down—while I would argue that Counting Crows are better than Limp Bizkit, I would not expect a court to take up the issue—it seems there was no loss of economic welfare and therefore no antitrust claim.

Not all antitrust scholars think this is the right result. Some have argued that the economic welfare standard is lacking precisely because it does a poor job of addressing nonprice competition. They have argued for a “consumer choice” standard instead of economic welfare, defined as business conduct “that harmfully and significantly limits the range of choices that the free market, absent the restraints being challenged, would have provided.” Neil W. Averitt & Robert H. Lande, Using the “Consumer Choice” Approach to Antitrust Law, 74 ANTITRUST L.J. 175, 184 (2007). If applied, the consumer choice standard would be more likely to provide a remedy for the Y2K curse.

Regulators and courts do sometimes consider diminished choices as indicative of anticompetitive activity. For example, in Associated Gen. Contractors v. Cal. State Council of Carpenters, 459 U.S. 519, 528 (1983), the Supreme Court held that “[c]oercive activity that prevents its victims from making free choices between market alternatives is inherently destructive of competitive conditions.” In Realcomp II, Ltd. v. FTC, 635 F.3d 815 (6th Cir. 2011), the Sixth Circuit upheld an FTC decision finding that certain policies violated the antitrust laws when they “narrow[ed] consumer choice” and “hinder[ed] the competitive process” without examining price effects.

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Author: Steven Madoff

Steven Madoff was an Executive Vice President of Business and Legal Affairs for Paramount Pictures Corporation from 1997-2006.

The recent announcement by the Antitrust Division of the Department of Justice that it is planning to terminate the 70-year-old Paramount Consent Decrees leads to reflection on how culture, business models, the law, and technology intersect and impact one another.

The history of the motion picture business resonates with the evolution (and sometimes revolution) of technology, the industry’s adaptation of its business models to respond to these changes in technology and the impact of these changes and adaptations to cultural transitions and transformations.

Virtually from its birth in the early 20th century, the motion picture industry attracted the scrutiny of governmental regulators. As early as the 1920’s, the U.S. Justice Department started looking into the trade practices and dominant market share of the Hollywood studios.

The Studio System

In the early 1930’s, the Justice Department found that the major studios were vertically-integrated monopolies that produced the motion pictures, employed the talent (directors, writers, actors) under long-term exclusive contracts, distributed the motion pictures and also owned or controlled many of the theaters that exhibited the movies. This was sometimes called the “studio system.”

Particularly troubling were the studios’ practices of block booking and blind bidding. Block booking is the practice of licensing one feature film or group of feature films on the condition that the licensee-exhibitor will also license another feature film or group of feature films released by the same distributor. Block booking prevents customers from bidding for individual feature films on their own merits. Blind bidding or blind selling is the practice whereby a distributor licenses a feature film before the exhibitor is afforded an opportunity to view it. These practices were particularly onerous when applied against independent theater owners not owned or affiliated with the studio-distributor.

It seemed like the time had come for the government to force the studios to divest their ownership of the exhibition side of the business. But the Depression intervened and the studios convinced President Roosevelt that the country needed a strong studio system to supply movie entertainment to the populous as a relief from tough economic times. President Roosevelt therefore delayed any action requiring the studios to divest their theaters under the goals of the National Industrial Recovery Act.

The Paramount Consent Decrees

But, by 1940, the Department of Justice filed a lawsuit against the studios alleging violations of Sherman 1 and 2—restraint of trade and monopolization. The claims were made against what were then called the Big Five Studios, all of which produced, distributed and exhibited films (MGM, Paramount, RKO, Twentieth Century-Fox and Warner Bros.) and what were called the Little Three studios, which produced and distributed films but did not exhibit them (Columbia, United Arts and Universal).

At the time, Paramount was the largest studio and exhibitor and was first-named in the lawsuit, and so in 1940 when the studios reached a settlement with the Department of Justice, the resulting arrangement became known as the Paramount Consent Decrees.

As part of the Consent Decrees, the Studios were not required to divest their ownership in theaters; however, block booking was dramatically cut back (e.g., no tying of short subjects to feature films and no “packages” in excess of five feature films) and blind bidding was prohibited. The parties agreed to a 3-year period for the Consent Decrees during which the Department of Justice would monitor compliance by the Studios.

By 1946, however, the Department of Justice had determined the Studios were not in compliance and brought the case back to the Federal District Court.  After the trial, the Court ruled that the Studios could no longer engage in block booking, but did not require them to divest their ownership in theaters, which the Department of Justice had asked for. Both parties appealed the case, which eventually reached the US Supreme Court.

In a 7-1 decision, written by Justice William O. Douglas, the Court found, among other things, that block booking was a per se violation of Sherman 1 and in remanding the case to the District Court recommended that the Studios be ordered to divest their ownership in theaters. But before the District Court rendered a decision on whether the Studios should divest their theaters, one of the Big Five Studio defendants, RKO Pictures (then controlled by Howard Hughes) decided to sell its theaters. After that, another Big Five Studio defendant, Paramount, sold its theaters.

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Author: Steven Madoff

If you are an in-house counsel, your company colleagues may, unfortunately, think of your group as the “business interference” department. But, if you are lucky, an opportunity to create a profit-center for your company may present itself. You just have to recognize it.

Early in my entertainment-law career, we were fortunate to see one of these rare opportunities. This is that story.

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Author: Jarod Bona

As an antitrust lawyer, I find it interesting to see the inner workings of different types of markets—how people and companies buy and sell things. And the entertainment industry is one of the more fascinating ones.

The entertainment industry includes an interesting mix of concentrated players at various levels of production and distribution, often vertically integrated. Streaming services like Netflix have brought on changes that the coronavirus pandemic will likely accelerate.

Indeed, the federal government is even ending the old Paramount Antitrust Consent Decree, which governed the motion-picture industry for decades. You can read about that from our attorney, Steven Madoff, who was a top-level lawyer for Paramount for years, and an expert (literally) in the entertainment and media industry.

If the entertainment market or Hollywood itself interests you, there is a federal antitrust case in the Central District of California that you should follow: William Morris Endeavor Entertainment, LLC. v. Writers Guild of America, West, Inc.

This is a lawsuit by the major Hollywood agencies against the Writers’ unions, along with a counterclaim by the Writers’ union against the agencies. Labor unions, of course, create some unique antitrust issues, which you can read about here.

On April 27, 2020, the Court granted in part and denied in part a motion to dismiss by the agencies.

What I found interesting about this case, among other items, is that it attacks a practice developed by Michael Ovitz and his Creative Artists Agency firm called “packaging.”

Before I dig into packaging, I have to recommend that you read Michael Ovitz’s autobiography: Who is Michael Ovitz? In his book, he is open about his successes and excesses. If you are building a professional services firm, like I am, you will particularly appreciate riding along as Michael Ovitz builds a talent agency that changes the way business is done in Hollywood. You hear some “inside baseball” about Hollywood and learn how to build a business from scratch, all at once. Indeed, you learn how to change an industry. Seriously, it’s a good read.

Back to “Packaging.” Instead of letting the studios take the lead in building movie or television projects and hiring the writers, actors, and directors that the agencies represented, the agencies would create their own project proposals for the studios. Not surprisingly, in doing so, they would “package” together a group of people, in different roles and positions, that they represent.

As part of the cost of this packaging service, the talent agencies would receive a fee from the studio. Before packaging, talent agencies were compensated by commissions as a percentage of their clients’ compensation.

The writer unions asserted that these packaging services harmed both writers and the guilds themselves and created conflict of interests for the agencies between their writer-clients and the production studios.

The complaint also alleged that the talent agencies price-fix the fees for these packages and exchange competitive sensitive information with each other about their packaging fee practices.

I won’t get into all the details here—my purpose is merely to whet your appetite to follow the case—but the writer guilds took certain actions that the talent agencies didn’t like, who then took their own actions, and eventually they all sued each other, leaving a California federal judge to sort it out.

As I mentioned above, the Court issued a motion to dismiss ruling, which allowed some claims, while dismissing others. I am not going to go into the details, but I will point out one interesting aspect of the ruling: The Court dismissed the federal antitrust price-fixing claims for lack of standing because the injured parties didn’t participate in the market that was competitively harmed. But the Court allowed a price-fixing claim under the same facts to go forward under the California antitrust statute—the Cartwright Act—because this statute doesn’t have the more restrictive definition of antitrust standing that the federal antitrust laws have.

For antitrust attorneys, this is particularly interesting because in most cases in which a plaintiff includes both federal and state antitrust claims, they rise and fall together. Here, the California antitrust claims (under the Cartwright Act) survived while the federal ones fell.

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