One MLS: The Benefit of a Reemergence

April 2015Professional Sports and The Law

Just three days shy of the season opening game, Major League Soccer Players Union (“MLSPU”) voted 18-1, with one team’s player representative abstaining, to go on strike after Major League Soccer, LLC’s (“MLS”) latest collective bargaining agreement (“CBA”) proposal. Within 24 hours, the parties agreed to major principles of a CBA, and the league, players and fans were all set for the 2015 season, marking the twentieth anniversary of the league.

MLS is the first major professional sports league (“MPSL”) in the United States to avoid a lockout following its expiration of a CBA since the American Needle v. National Football League (“American Needle”) decision.1 Understanding the MLS’s structure and its intent and the history of Division I professional soccer in the United States reveals why MLS is arguably in a better position than the National Football League (“NFL”) and other MPSLs to defend a section 1 of the Sherman Antitrust Act (“Section 1”) claim.

MPSLs are a difficult product to analogize to your typical consumer product. Teams within a league must compete in order to generate a product, since a single team league is imaginably quite uneventful, yet and perhaps less obvious, teams need to collaborate, such as on game rules, schedules and other ancillary cooperation, to create a product. In comparison, a sole product in a market may be improved by competition, but does not need competition to exist. This unique collaborative quality of a league’s product potentially exposes them to Section 1 claims, and specifically for our discussion, a lack of an agreement governing labor relations, i.e. a CBA, nullifies a league’s non-statutory antitrust exemption from the National Labor Relations Act, thus opening leagues up to these Section 1 claims.

As the Supreme Court stated in its review of American Needle, “the question whether an arrangement is a contract, combination, or conspiracy is different from and antecedent to the question whether it unreasonably restrains trade.”2  MPSLs face this antecedent question when developing their product, and must balance necessities of cooperation against its potentially resulting Section 1 implications.

Despite the seemingly adverse ruling to MPSLs, the American Needle case, where the Supreme Court held that each NFL team is a “substantial, independently owned and managed business,”3 contained two silver-lining outcomes for the MLS. First, the Court applied the Rule of Reason, which is a “functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.”4 A court would be required to evaluate not only the facts but motivation and intent of a league’s operating structure.5 Second, in applying the Rule of Reason, the Court acknowledged that MPSLs are not trapped by antitrust laws, and “the special characteristics of [sports leagues] may provide a justification for many kinds of agreements.”6 The Court, in a 9-0 decision, distinguished between the American Needle concerted activity and “a host” of collective decisions related to MPSLs that may be perfectly sensible due to the nature of teams sharing the interest of making an entire league successful.

First, in its review of the NFL and decision-making in American Needle, the Supreme Court found troubling that the NFL teams did not possess “the single aggregation of economic power characteristic of independent action,” and particularly, that the NFL teams separately owned their intellectual property rights.7

MLS was purposefully8 formed under a single-entity structure in an attempt to reflect “internally coordinated conduct of a corporation and [teams as] its unincorporated divisions.”9 All MLS players are directly contracted with MLS and are then assigned by the league to a particular team. Before the current CBA, there was no free agency and all trades required prior league approval. Each MLS team is an “Investor-Operator,” a shareholder in the league receiving a management fee determined by a fixed percentage of local revenues specific to their market, e.g., ticket sales, local staff and local broadcast rights. The NFL on the other hand is a trade association made up of and financed by its 32 member teams, which exhibit much more discretion in contracting with players and its capital allocation. MLS’s control of players and lack of operational discretion by teams reflect the unification of interests and unitary consciousness of Division I soccer in the United States.

In addition, MLS’s NFLP counterpart, Soccer United Marketing (“SUM”), was created to adhere to Copperweld; the seminal Supreme Court decision that exempted a parent and wholly owned subsidiary from Section 1 claims since their agreements reflected unilateral conduct rather than concerted conduct.10 In 2002, MLS formed SUM as a wholly owned subsidiary of MLS to handle league-wide marketing.11 Although SUM’s functions mirror that of the NFLP (as expected after the MLS Commissioner and SUM CEO Dan Garber spends 16 years in the NFL, including the NFLP), MLS’s intellectual property never existed independently, and therefore does not represent the joining of two independent sources of economic power or an evasion of Section 1 scrutiny by giving it a name and label, as noted of the NFLP in American Needle.12 A Rule of Reason review of the MLS structure in its host of collective decisions favors more of a liking to parent-subsidiary collaboration than the joining of independent economic decision-making centers.

Second, MLS’s purposeful business strategy not only further strengthens its unitary interest nature, but also provides a sensible justification for its collective decisions. From 1968 to 1984, there existed a Division I professional soccer league in the United States whose demise is largely credited to teams spending more than they could afford in order to keep up with the teams that could afford marquee players and over-expansion of the league.13 MLS experts acknowledge that the current MLS structure has “nurtured the league and helped keep things on an even playing level,” and that “the help and resources of MLS to really get [new expansion teams] up and running will be necessary.”14 Direct control over spending, particularly the cost of labor, and equitable revenue-sharing among clubs, allows MLS to uniformly promote a competitive balance of play. A centralized control of MLS teams also attracts and retains investors by reducing their operational risks. Having brought the number of competitors of Division I professional soccer in the United States from zero to one,15 the current MLS structure is a sensible justification to overcome its historic hitches and endure through its recent difficulties.

Moving beyond the American Needle framework, more than any other league, MLS and its players want to remain on favorable terms. MLS wants to avoid a Section 1 claim all together after Fraser’s finding that MLS is a hybrid corporation,16 which guarantees the MLS a thorough litigation of any Section 1 claim, a demonstrated concern as reflected in its amicus curiae brief in American Needle.17 In addition, over its first ten years MLS established a track record of losing money, and has only recently exhibited the benefits of centralized control: MLS’s average team has gone from a $37M valuation in 2008 to a $103M valuation in 2013, and in 2011 had higher average attendance than that of NBA and NHL.18 This continued growth understandably depends on the highest-quality, continued play the MLS can offer.

As a 90s child, MLS has been able to purposefully structure its organization and product to be better protected from Section 1 claims. The MLS, its players and its fans also still remember the period where no Division I professional league soccer was played in the United States. These benefits position the MLS as the MPSL most interested in equitable negotiations with its players as both parties to the CBA depend more on securing continuous play in this growing sport. This is evidenced from the five year CBA generally agreed to that includes limited free agency and an increased salary minimum and cap, which benefits the players and consequently, the league overall. The MLS, its teams and players continued common consciousness moving forward will enable soccer’s marketability and popularity proliferation in the United States to the growing enjoyment of more and more fans.

1 American Needle, Inc. v. Nat’l Football League, 560 U.S. 183 (2010). In this case, an apparel corporation and previous licensee of the NFL, American Needle, Inc. (“American Needle”), claimed that the NFL, National Football League Properties LLC (the “NFLP”), Reebok and each NFL team, having preserved ownership of its intellectual property despite its use of the NFLP, a separate entity entrusted with the development, production, and contracting of NFL teams’ intellectual property rights, violated Section 1 by conspiring to restrict the ability of vendors such as American Needle to obtain licenses of NFL teams’ intellectual property. The claim came about after the NFL teams terminated several of its licensing agreements, including American Needle’s, for a single, exclusive ten-year contract through the NFLP with Reebok in 2000.

2 American Needle, Inc., at 186.

3 American Needle, Inc., at 196.

4 American Needle, Inc., at 191.

5 Robert Sroka, “Major League Single-Entity: The Impact of American Needle on Major League Soccer” (December 18, 2011). Page 3 of 49. Available at SSRN: abstract=2543736.

6 American Needle, Inc., at 202.

7 American Needle, Inc., at 196-198.

8 Fraser v. Major League Soccer, 97 F. Supp. 2d 130, 132 (D. Mass. 2000); aff’d 284 F. 3d 47 (1st Cir. 2002). In this case, soccer players employed by the newly minted MLS without a CBA in place asserted a number of antitrust claims, one of which was that the MLS and its teams restrained trade or commerce in violation of Section 1. In the District and Circuit Courts review of MLS’s structure, both courts recognized the purposeful form of the league’s single-entity corporate structure, and the Circuit Court in particular disagreed completely to the players’ contention that the form is a conspiracy to fix salaries. See at 139 and 56, respectively.

9 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 770 (1984). In this case, Copperweld purchased Regal Tube Co., an unincorporated division of Lear Siegler, Inc, under a sale agreement that prevented the seller Lear from competing with Regal for five years. Regal’s assets were then transferred to a newly formed, wholly owned subsidiary of Copperweld. Independence was a corporation formed by Lear to compete with Regal. Independence filed an action against Coppwerweld, Regal and a manufacturer after the manufacturer did not complete a purchase order pursuant to a letter from Copperweld outlining the noncompetition agreement in connection with the purchase of Regal. After the District and Court of Appeals found Copperweld and Regal the only parties involved in the conspiracy, the Supreme Court refused to render a parent and subsidiary as having two distinct economic interests, albeit being separately incorporated, subject to Section 1 claims.

10 Copperweld Corp., at 776.

11 SUM also controls all commercial rights associated with the United States Soccer Federation (Men’s and Women’s national teams), as well as promotional and marketing rights for CONCACAF Gold Cup. Subsequently in 2009, SUM also created MLS Digital Properties to develop the digital marketing for MLS. As of 2011, Providence Equity Partners, a private equity firm founded by billionaire Jonathan Nelson, reportedly bought 25% of SUM in 2011 for around $150 million.

12 Sroka, “Major League Single-Entity…” Page 40 of 49.

13 Matt White “WORLD CUP USA ’94: A Model Failure: The NASL’s Collapse Serves as a Painful Reminder of What a New League Should Not Do” (July 3, 1994). LA Times. Retrieved March 11, 2015.

14 Sean Spence “Roundtable: Is MLS Single Entity Here to Stay?” (February 28, 2014) ttp:// Nation. Retrieved March 9, 2015.

15 Fraser, 97 F. Supp. 2d at 142. In denying plaintiff’s summary judgment against the MLS on its “single entity” defense, the District Court did note that MLS could not have merged market participants when there were none to start off.

16 Fraser, 284 F. 3d at 58. MLS ultimately won Fraser v. MLS on other grounds and left the single-entity status of MLS ambiguous, describing the MLS as “a hybrid arrangement.”

17 Sroka, “Major League Single-Entity…” Pages 24-25 of 49.

18 Chris Smith, “Major League Soccer’s Most Valuable Teams” (November 20, 2013). Forbes. Retrieved April 7, 2015.