Saturday, August 22, 2009

The Anti-Trust Question

The legal maneuvering by the NHL, Jerry Moyes, and Jim Balsillie continues in Judge Redfield Baum's Phoenix bankruptcy court with each side filing motions and counter-motions in an attempt to establish favorable position before the September hearing date. One motion in particular has been filed by attorneys for Jim Balsillie that merits close attention. On May 7th, a motion was filed by Balsillie's attorney's that seeks injunctive relief against the NHL for violation of federal anti-trust laws. The claim is that the NHL unlawfully exercises market power for NHL games to the exclusion of competition and restraint of trade through unreasonable restrictions in its constitution and by-laws, specifically those which prevent the relocation of the Coyotes franchise. The claim is that the NHL has conspired to maintain monopoly power over teams in violation of the Sherman Anti-Trust Act by use of "home territories" as defined in section 4.1 of the NHL constitution which prohibits the relocation of teams into markets where existing teams are currently located.

To grasp the significance of this filing, it is important first to have an understanding of the Sherman Anti-Trust Act that is referenced therein. The Sherman Act was passed in 1890, and in its simplest form, outlaws monopolistic business practices. Originally passed to limit the activity of trusts, such as the Standard Oil Trust, the act has been used to prohibit business entities that had combined to restrain trade or competition. Originally, competing business would form a trust with each member having an ownership interest in the trust. The trust determined membership in the trust and operating rules. The component companies would contribute their profits to the trust and in turn the trust paid dividends back to the companies under a pre-approved formula. Since the trust controlled all the member companies, it could operate as a monopoly. The Act specifically prohibits the exercise of monopoly powers and the restraint of trade through a vehicle such as a trust.

Some of the considerations that are weighed in determining a violation of the Act are: do close substitutes exist?; are there defined exclusive geographical territories for the members?; and are there high barriers to entry? When you read the description of the trusts that were outlawed under the Act and how they operated, and when you review the considerations that have to occur in a violation of the Act, it sounds suspiciously like a professional sports league. Balsillie's filing claims that these characteristics and manner of operation have created a monopoly and an absolute barrier to entry to competitors and results in a restraint of trade. In reading Balsillie's filing, the groundwork is laid to bolster a complaint under the Act. His attorney's complaint says that the NHL had engaged in a conspiracy to unlawfully restrain trade, limit location of franchises, and is anti-competitive. The last point of their motion, anti-competitiveness, states that by not allowing a franchise in Hamilton, fans are deprived of seeing NHL hockey. An interesting claim since most anti-trust actions that deal with competitive aspects focus on price competition. Would a franchise in Hamilton lower ticket prices in Toronto or Buffalo? Certainly not in Toronto; perhaps in Buffalo. Other claims in the filing are that the constitution and by-laws of the NHL are exclusionary due to an unreasonable relocation process for an NHL club. The salient point of the complaint is the claim that although individual clubs are members of the NHL, they are independent businesses and thus engaged in a conspiracy to restrain trade.

In my post of July 21, A Needle in a Legal Haystack, I discussed the case of the NFL versus American Needle Incorporated. In that case, the NFL has asked the U. S. Supreme Court to declare the League as a single enterprise and as such is exempt from anti-trust regulations. Essentially, the NFL claims that it is not a league of 32 individual business, but a single entity that can make business decisions for the whole without running afoul of anti-trust provisions. Typically, courts have been loath to interfere in the operations of a sports league, and to a limited extent have agreed with that position. A favorable ruling by the Supreme Court in this case would codify that reluctance into law in all aspects of their business operations and protect all sports leagues from the type of action that Balsillie has filed in the bankruptcy proceedings.

Should Balsillie prevail with this filing, the professional sports landscape will be significantly altered. Franchises would be free to move to another city willing to provide the acceptable financial inducements. The ability to control the location of its franchises is a source of stability for all professional sports leagues. Loss of that ability could turn franchises into a portable commodity. Balsillie's filing asks that the court to permanently enjoin the NHL from enforcing the provisions of its constitution that prohibit the relocation of a franchise. The ramifications of a victory will be felt not only in the NHL, but the NFL, NBA, and Major League Baseball, which is why each of these professional leagues has assembled a team of high powered attorneys to argue in support of the NHL.

If Balsillie is rejected as a potential owner by the court in a hearing on September 2nd (which I think will happen), then his legal team will press the anti-trust argument. Will this tactic be successful? At this point, it is difficult to tell how the court will rule. The balance that must be struck by Judge Baum is obtaining the best price for the asset that is the Coyotes hockey club for the benefit of the creditors and the right of a private enterprise to lawfully conduct business as it sees fit. The ruling could shake the foundations of the professional sports world.

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