Search Results For NCAA

In a June 12, 2014 TOTM post, I discussed the private antitrust challenge to NCAA rules that barred NCAA member universities from compensating athletes for use of their images and names in television broadcasts and video games.

On August 8 a federal district judge held that the NCAA had violated the antitrust laws and enjoined the NCAA from enforcing those rules, effective 2016.  The judge’s 99-page opinion, which discusses NCAA price-fixing agreements, is worth a read.  It confronts and debunks the NCAA’s efficiency justifications for their cartel-like restrictions on athletic scholarships.  If the decision withstands appeal, it will allow  NCAA member schools to offer prospective football and basketball recruits trust funds that could be accessed after graduation (subject to certain limitations), granting those athletes a share of the billions of dollars in revenues they generate for NCAA member universities.

A large number of NCAA rules undoubtedly generate substantial efficiencies that benefit NCAA  member institutions, college sports fans, and college athletes.  But the beneficial nature of those rules does not justify separate monopsony price fixing arrangements that disadvantage athletic recruits – arrangements that cannot legitimately be tied to the NCAA’s welfare-enhancing interest in promoting intercollegiate athletics.  Stay tuned.

On September 30, in O’Bannon v. NCAA, the U.S. Court of Appeals for the 9th Circuit held that the National Collegiate Athletic Association’s (NCAA) rules that prohibited student athletes from being paid for the use of their names, images, and likenesses are subject to the antitrust laws and constitute an unlawful restraint of trade, under the antitrust rule of reason.  This landmark holding represents the first federal appellate condemnation of NCAA limitations on compensating student athletes.  (In two previous Truth on the Market posts I discussed this lawsuit and later explained that I agreed with the federal district court’s decision striking down these NCAA rules.)  The gist of the 9th Circuit’s opinion is summarized by the Court’s staff:

“The [9th Circuit] panel held that it was not precluded from reaching the merits of plaintiffs’ Sherman Act claim because:  (1) the Supreme Court did not hold in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984), that the NCAA’s amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA’s rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.

The panel held that even though many of the NCAA’s rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason.  Applying the Rule of Reason, the panel held that the NCAA’s rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the “price” that recruits pay to attend college.  The record supported the district court’s finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism.  The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules – i.e., allowing NCAA members to give scholarships up to the full cost of attendance – but the district court’s other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous.  The panel vacated the district court’s judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.

Chief Judge Thomas concurred in part and dissented in part. He  disagreed with the [two judge panel] majority’s conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes’ full cost of attendance.”

The key point of the 9th Circuit’s decision, that competitively restrictive rules are not exempt from antitrust scrutiny because they promote the perception of “amateurism,” is clearly correct, and in line with modern antitrust jurisprudence.  The Supreme Court has taught that anticompetitive restrictions aimed at furthering the reputation of the learned professions (see Goldfarb v. Virginia State Bar (1975), striking down a minimum legal fee schedule for title searches), and their ability to advance social goals effectively (see FTC v. Superior Court Trial Lawyers Association (1990), condemning a joint effort to raise government-paid legal aid fees and thereby “enhance” the quality of legal aid representation), are fully subject to antitrust review.  Even the alleged desire to ensure that quality medical services are not sacrificed (see FTC v. Indiana Federation of Dentists (1986), rejecting a dental association’s agreement to deny insurers’ request for procedure-specific dental x-rays), and that safety is maintained in major construction projects (see National Society of Professional Engineers v. United States (1978), striking down an ethical canon barring competitive bids for engineering services), do not shield agreements from antitrust evaluation and potential condemnation.  In light of those teachings, the NCAA’s claim (based on a clear misreading of the Supreme Court’s NCAA v. Board of Regents (1984) decision) that its highly restrictive “amateurism” rules should be exempt from antitrust review is patently absurd.

Moreover, as a matter of substance, the NCAA is precisely the sort of institution whose rules merit close evaluation by antitrust enforcers.  The NCAA is a monopsony cartel, representing the institutions (America’s colleges) which effectively are the sole buyers of the services of high school football and basketball players who hope to pursue professional sports careers.  Moreover, the NCAA’s rules regarding student athletes greatly limit competition, artificially limit athletes’ compensation, and are in severe tension with the “scholar-athlete” ideal that the NCAA claims it promotes.  In 2011, the late University of Chicago Professor Gary Becker, a Nobel Laureate in Economics, put it starkly:

“[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players.  NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work.  The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players’ parents, and of course the size of scholarships.

It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players.  The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes. Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. .

A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games. . . .

[T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.

Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout.  The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams.  Schools usually forget about athletes when they stop competing.  An important further difference between athletes and non-athletes who drop out of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes.  They could have used these additional assets to help them finish school, or to get a better start if they dropped out.”

Also in 2011, Judge Richard Posner of the 7th Circuit echoed Professor Becker’s views regarding NCAA student competition rules and noted the NCAA’s history of avoiding antitrust problems:

“The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes.  Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged.  The justification that the NCAA offers – that collegiate athletes are students and would be corrupted by being salaried – coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.

As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their “employers,” the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid.”

In sum, the 9th Circuit O’Bannon Court merits praise for deciding clearly and unequivocally that antitrust applies to the NCAA’s student athlete rules, irrespective of whether one agrees with the specific holding in the case.  The antitrust laws are a “consumer welfare prescription” that applies generally to activities that have an impact on interstate commerce, and short shrift should be given to the claim by any institution that it should be antitrust-exempt based on the alleged “virtue” or “public-spiritedness” of its actions.  (This reasoning also supports the lifting of baseball’s antitrust exemption, which stems from a 1922 Supreme Court decision that is out of step with modern antitrust jurisprudence.  But that is a matter for another day.)

On September 30, in O’Bannon v. NCAA, the U.S. Court of Appeals for the 9th Circuit held that the National Collegiate Athletic Association’s (NCAA) rules that prohibited student athletes from being paid for the use of their names, images, and likenesses are subject to the antitrust laws and constitute an unlawful restraint of trade, under the antitrust rule of reason. This landmark holding represents the first federal appellate condemnation of NCAA limitations on compensating student athletes. (In two previous Truth on the Market posts I discussed this lawsuit and later explained that I agreed with the federal district court’s decision striking down these NCAA rules.) The gist of the 9th Circuit’s opinion is summarized by the Court’s staff:

The [9th Circuit] panel held that it was not precluded from reaching the merits of plaintiffs’ Sherman Act claim because: (1) the Supreme Court did not hold in NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984), that the NCAA’s amateurism rules are valid as a matter of law; (2) the rules are subject to the Sherman Act because they regulate commercial activity; and (3) the plaintiffs established that they suffered injury in fact, and therefore had standing, by showing that, absent the NCAA’s rules, video game makers would likely pay them for the right to use their names, images, and likenesses in college sports video games.

The panel held that even though many of the NCAA’s rules were likely to be procompetitive, they were not exempt from antitrust scrutiny and must be analyzed under the Rule of Reason. Applying the Rule of Reason, the panel held that the NCAA’s rules had significant anticompetitive effects within the college education market, in that they fixed an aspect of the “price” that recruits pay to attend college. The record supported the district court’s finding that the rules served the procompetitive purposes of integrating academics with athletics and preserving the popularity of the NCAA’s product by promoting its current understanding of amateurism. The panel concluded that the district court identified one proper less restrictive alternative to the current NCAA rules – i.e., allowing NCAA members to give scholarships up to the full cost of attendance – but the district court’s other remedy, allowing students to be paid cash compensation of up to $5,000 per year, was erroneous. The panel vacated the district court’s judgment and permanent injunction insofar as they required the NCAA to allow its member schools to pay student-athletes up to $5,000 per year in deferred compensation.

Chief Judge Thomas concurred in part and dissented in part. He disagreed with the [two judge panel] majority’s conclusion that the district court clearly erred in ordering the NCAA to permit up to $5,000 in deferred compensation above student-athletes’ full cost of attendance.

The key point of the 9th Circuit’s decision, that competitively restrictive rules are not exempt from antitrust scrutiny because they promote the perception of “amateurism,” is clearly correct, and in line with modern antitrust jurisprudence. The Supreme Court has taught that anticompetitive restrictions aimed at furthering the reputation of the learned professions (see Goldfarb v. Virginia State Bar (1975), striking down a minimum legal fee schedule for title searches), and their ability to advance social goals effectively (see FTC v. Superior Court Trial Lawyers Association (1990), condemning a joint effort to raise government-paid legal aid fees and thereby “enhance” the quality of legal aid representation), are fully subject to antitrust review. Even the alleged desire to ensure that quality medical services are not sacrificed (see FTC v. Indiana Federation of Dentists (1986), rejecting a dental association’s agreement to deny insurers’ request for procedure-specific dental x-rays), and that safety is maintained in major construction projects (see National Society of Professional Engineers v. United States (1978), striking down an ethical canon barring competitive bids for engineering services), do not shield agreements from antitrust evaluation and potential condemnation. In light of those teachings, the NCAA’s claim (based on a clear misreading of the Supreme Court’s NCAA v. Board of Regents (1984) decision) that its highly restrictive “amateurism” rules should be exempt from antitrust review is patently absurd.

Moreover, as a matter of substance, the NCAA is precisely the sort of institution whose rules merit close evaluation by antitrust enforcers. The NCAA is a monopsony cartel, representing the institutions (America’s colleges) which effectively are the sole buyers of the services of high school football and basketball players who hope to pursue professional sports careers. Moreover, the NCAA’s rules regarding student athletes greatly limit competition, artificially limit athletes’ compensation, and are in severe tension with the “scholar-athlete” ideal that the NCAA claims it promotes. In 2011, the late University of Chicago Professor Gary Becker, a Nobel Laureate in Economics, put it starkly:

[T]he NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players. NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work. The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players’ parents, and of course the size of scholarships.

It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players. The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes. Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses. . . .
A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas. Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games. . . .

[T]he graduation rates for these minority students-athletes are depressingly low. For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.

Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout. The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams. Schools usually forget about athletes when they stop competing. An important further difference between athletes and non-athletes who drop out of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes. They could have used these additional assets to help them finish school, or to get a better start if they dropped out.

Also in 2011, Judge Richard Posner of the 7th Circuit echoed Professor Becker’s views regarding NCAA student competition rules and noted the NCAA’s history of avoiding antitrust problems:

The National Collegiate Athletic Association behaves monopsonistically in forbidding its member colleges and universities to pay its athletes. Although cartels, including monopsonistic ones, are generally deemed to be illegal per se under American antitrust law, the NCAA’s monopsonistic behavior has thus far not been successfully challenged. The justification that the NCAA offers – that collegiate athletes are students and would be corrupted by being salaried – coupled with the fact that the members of the NCAA, and the NCAA itself, are formally not-for-profit institutions, have had sufficient appeal to enable the association to continue to impose and enforce its rule against paying student athletes, and a number of subsidiary rules designed to prevent the cheating by cartel members that plagues most cartels.

As Becker points out, were it not for the monopsonistic rule against paying student athletes, these athletes would be paid; the monopsony transfers wealth from them to their “employers,” the colleges. A further consequence is that college teams are smaller and, more important, of lower quality than they would be if the student athletes were paid.

In sum, the 9th Circuit O’Bannon Court merits praise for deciding clearly and unequivocally that antitrust applies to the NCAA’s student athlete rules, irrespective of whether one agrees with the specific holding in the case. The antitrust laws are a “consumer welfare prescription” that applies generally to activities that have an impact on interstate commerce, and short shrift should be given to any institution that claims it should be antitrust-exempt based on the alleged “virtue” or “public-spiritedness” of its actions. (This reasoning also supports the lifting of baseball’s antitrust exemption, which stems from a 1922 Supreme Court decision that is out of step with modern antitrust jurisprudence. But that is a matter for another day.)

The National Collegiate Athletic Association’s (NCAA’s) longstanding cartel-like arrangements once again are facing serious legal scrutiny.  On June 9 a federal antitrust trial opened in Oakland featuring college athletes’ attempt to enjoin the NCAA from exploiting the athletes’ names, images, and likenesses (“rights of publicity”) for profitRights of publicity are a well-recognized form of intellectual property.  Although the factual details concerning the means by which NCAA institutions may have extracted those rights (for example, from signed waivers that may have been required as a condition for receipt of athletic scholarships) remain to be developed, a concerted NCAA effort to exploit the athletes’ IP, if proven, would be highly anticompetitive.  Consistent with the TOTM tradition of highlighting challenges to NCAA competitive arrangements, let’s look at what’s at stake.

The NCAA is involved in major sports-related revenue-producing projects with its corporate partners, such as Electronic Arts (EA), a $4 billion company that produces video games.  The money is big – EA’s NCAA Football game alone is reported to bring in over $200 million a year in gross revenues.  Although the NCAA has denied using player likenesses in video games, the creators of the NCAA Football series have indicated that actual athletes’ jersey numbers and attributes are used, a fact apparently known to NCAA executives.  Moreover, recent separate $20 million and $40 million settlements agreed to by the NCAA and EA in suits brought by college athletes provide additional indications that the NCAA may be aware that it has exploited college players’ rights of publicity.

So what is the antitrust angle?  In dealing with student athletes, the NCAA, which represents the interests of its member colleges, acts like a monopsony cartel, as Judge Posner has noted, and as Blair and Harrison have explained in detail.  Anticompetitive monopsony buyer agreements have long been struck down by the courts as Sherman Act violations, as in Mandeville Farms and in National Macaroni Manufacturers v. FTC, and occasionally have been the subject of criminal prosecution.

This does not necessarily mean, however, that all restrictions the NCAA places on student athletes run afoul of the antitrust laws.  As the Supreme Court made clear in the 1984 NCAA case, the federal antitrust laws apply to the NCAA, but competitive restraints may pass muster if they are justifiable means of fostering competition among amateur athletic teams, such as uniform rules defining the conditions of a sports contest, the eligibility of participants, or the sharing of responsibilities and benefits integral to the NCAA’s joint venture.

Like the anticompetitive restrictions on member colleges’ separate television contracts struck down by the Supreme Court in NCAA, however, the NCAA’s profiting from student athletes’ rights of publicity is not vital to the preservation of balanced collegiate amateur competition.   Likewise, it is not needed to avoid the payment of student salaries that some might argue smacks of disfavored “professionalism” (although others would argue it promotes healthy competition and avoids exploitation of athletes).  In contrast, a policy of vindicating athletes’ right of publicity enables them to capture the value of the intellectual property generated by their accomplishments, and thus incentivizes outstanding athletic achievements, consistent with the legitimate ends of NCAA competitions.  Proof of a concerted effort by the NCAA to deny this benefit to student athletes and instead to share the IP-generated proceeds only with member institutions would, if shown, appear to lack any cognizable efficiency justification, and thus be ripe for antitrust condemnation.

Whatever the outcome of the current rights of publicity litigation, the NCAA may expect to face antitrust scrutiny on a number of fronts.  This is as it should be.  While the organization clearly yields efficiencies that benefit consumers (such as establishing and overseeing rules and standards for many collegiate sports), its inherent temptation to act as a classic cartel for the financial benefit of its members will not disappear.  Indeed, its incentive to seek monopoly profits may rise, as the money generated by organized athletics and related entertainment offshoots continues to grow.  Accordingly, antitrust enforcers should remain vigilant, and efforts to obtain NCAA-specific statutory antitrust exemptions, even if well-meaning, should be resisted.

By William Kolasky

In my view, the Second Circuit’s decision in Apple e-Books, if not reversed by the Supreme Court, threatens to undo a half century of progress in reforming antitrust doctrine. In decision after decision, from White Motors through Leegin and Actavis, the Supreme Court has repeatedly held—in cases involving both horizontal and vertical restraints—that the only test for whether an agreement can be found per se unlawful under Section 1 is whether it is “a naked [restraint] of trade with no purpose except stifling competition,” or whether it is instead “ancillary to the legitimate and competitive purposes” of a business association. Dagher. The cases in which the Court has consistently applied this test read like a litany of antitrust decisions we all now study in law school: White Motors, Topco, GTE Sylvania, Professional Engineers, BMI, Maricopa, NCAA, Business Electronics, ARCO, California Dental, Dagher, Leegin, American Needle, and, most recently, Actavis. Significantly, more than two-thirds of these cases involved horizontal, not vertical restraints.

In these decisions, the Court has also repeatedly warned that this test cannot be applied by simply asking whether the defendants “have literally ‘fixed’ a ‘price,” or otherwise agreed not to compete. Warning that “[l]iteralness is overly simplistic and often overbroad,” the Court insisted in BMI that courts instead focus on “the effect and, because it tends to show effect…, on the purpose of the practice” to determine whether “the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output… or instead one designed to ‘increase economic efficiency and render markets more, rather than less, competitive.”

In applying this test the Court has also repeatedly emphasized that a court should classify an alleged restraint—whether horizontal or vertical—as per se unlawful “only after considerable experience” with the particular restraint at issue. In addition, the Court has repeatedly emphasized that all that is necessary for a restraint to escape per se illegality is that there be a “plausible” procompetitive purpose behind it. See, e.g., Cal Dental; Business Electronics; Northwest Wholesale Stationers.

By focusing so much attention in their cert. papers on whether the agreements between Apple and the publishers should be characterized as “vertical” or “horizontal,” both Apple and the DOJ seem to have lost sight of the fundamental teachings of this long line of Supreme Court decisions—namely, that even if an agreement is horizontal, it can be found to be per se unlawful only if it is a naked agreement that, on its face, serves no purpose other than to restrict competition and restrain output. This is particularly important where, as in this case, the alleged agreements have both horizontal and vertical elements. In such cases, the right question is not whether the agreements can be labeled a “hub-and-spoke conspiracy,” but instead what the nature and purpose of those agreements were.

In this case, the nature of the arrangement between Apple and the publishers by which they all appointed Apple as their common sales agent is not fundamentally different from the an agreement among a group of competitors to appoint a joint sales agent. While such an arrangement can, in some circumstances, be used to facilitate cartel behavior, it can also serve legitimate pro-competitive purposes by enabling those competitors to market their goods or services more efficiently. The courts and antitrust enforcement agencies have, therefore, recognized—ever since the Supreme Court’s decision in Appalachian Coals—that these joint sales arrangements must generally be evaluated under the rule of reason and cannot in all instances be condemned as per se unlawful. See, e.g., FTC/DOJ, Competitor Collaboration Guidelines(For those of you who remember the criticisms that used to be directed at that decision by your antitrust professor in law school, I urge you to read Sheldon Kimmel’s excellent revisionist article, How and Why the Per Se Rule Against Price Fixing Went Wrong, showing that the Court’s holding was perfectly consistent with its more recent rulings in BMI and its progeny.

Viewing this as an agreement among the publishers to appoint Apple as their common sales agent might have helped the lower courts to have focused on what should have been the key issues in the case. The first is whether the agency arrangement was a “naked” agreement to “restrict competition and decrease output,” or could “plausibly” have been intended to serve other legitimate pro-competitive business purposes. The second is whether, if so, the restraints that were part of this arrangement—such as price caps and most-favored nation clauses—were ancillary to those legitimate purposes.

Based on the record as I read it, it appears to me that the answers to these two questions are obvious, and that they compel the conclusion that this common sales agent arrangement could not be classified as per se unlawful, but would need to be evaluated under a full-blown rule of reason analysis. Let me address each issue in turn.

Was the common sales agent arrangement between Apple and the five publishers a naked agreement to fix prices and restrict output?

Neither the lower courts nor the parties in their cert papers address this key issue in any detail, choosing instead to spend page after page debating whether the agreement between Apple and the publishers was horizontal or vertical. Fortunately, the amicus briefs that were filed in support of Apple’s cert. petition by ICLE and by a group of antitrust economists do address the issue at considerable length.

Those briefs make a convincing argument that the common sale agent arrangements between the publishers and Apple were designed to serve at least two pro-competitive purposes. The first was to introduce greater competition into the downstream market for the distribution of e-books by ending Amazon’s below-cost pricing of e-books at the retail level. The second was to give the publishers greater control over the downstream pricing of their e-books in order to prevent below-cost pricing of e-books from cannibalizing the sales of their print books.

The common sale agent arrangement served to introduce more competition into the downstream market for the distribution of e-books

This one is easy. No one disputes that before Apple entered, Amazon dominated the downstream market for e-books with a 90% market share, giving it a virtual monopoly. Hopefully, few, if any, would dispute that Amazon’s loss-leader strategy of selling e-books at well below cost served to entrench its near monopoly position in that market. It is easy to understand why publishers of e-books would not want to allow Amazon’s monopoly to continue, leaving them with only a sole distributor for their products.

The record below makes it clear that Apple did not believe it could profitably enter the e-book market so long as Amazon continued to maintain its first-mover advantage by selling e-books below cost. Apple and the publishers therefore had a common interest in moving from the existing wholesale model of e-book distribution to a new agency model under which the publishers, not Amazon, would control the retail pricing of e-books and could set those prices at a level that would enable other competitors, such as Apple, to enter. That seems pro-competitive to me.

The record also makes it clear that this objective could not be accomplished through a simple vertical agency agreement between Apple and one or two individual publishers. In order to enter successfully, Apple needed a critical mass of titles, which it could have only by securing the agreement of most of the leading publishers to appoint it as their common sale agent. Apple, therefore, had a legitimate pro-competitive business reason to facilitate—or, as the Second Circuit charged, “orchestrate” —agreements among the publishers to switch to an agency model and to appoint Apple as their common non-exclusive agent for the sale of their e-books.

The common sales agent arrangement gave the publishers control over the retail prices of e-books, protecting them from harms to their businesses that could otherwise be caused by below-cost pricing by a single dominant retailer.

The Second Circuit and DOJ both make much of the fact that the publishers wanted to control the retail prices of e-books in order to raise those prices above the level set by Amazon’s loss-leader pricing strategy. They both seem to believe that this alone is enough to characterize their conduct as a “naked price fixing scheme.” But it is not. As the Supreme Court held in Leegin, resale price maintenance can be pro-competitive even if it leads to higher prices if it is designed promote competition by creating a more efficient and competitive distribution system.

As Areeda and Hovenkamp teach in their treatise, Fundamentals of Antitrust Law, the same principle applies to agreements among a group of horizontal competitors to appoint a single sales agent. Those competitors will frequently “have to agree with each other that they will not accept less than a certain minimum price, or sometimes may even have to agree on the entire price schedule,” and these prices may sometimes be higher than the prices at which they were previously selling the products individually. See Areeda & Hovenkamp (2015 Supp.), at 19:31-32. But even if these agreements result in an increase in price, they argue that it should not be found illegal if the effect on output is positive. Their argument is supported by the language in BMI, in which the Court focused on the effect of a restraint on output, not price, in describing what was necessary to classify an alleged restraint as a per se illegal naked price-fixing agreement.

Here, although the district court found that prices went up and output went down in the short run after the publishers switched from their wholesale model to an agency model, these immediate, short-term effects do not necessarily show that the switch to the new agency model might not, over the long-term, have resulted in an increase in output. DOJ concedes that since Apple’s entry, e-book sales have grown exponentially, but speculates that this growth might have occurred even if Amazon had continued to maintain its monopoly position in the retail sale of e-books. As someone who reads e-books on my iPad, I doubt that, but this is the type of issue that can only be resolved through a full rule-of-reason analysis, not through the application of a conclusive presumption of illegality under the per se doctrine.

Here, as the amicus briefs argue, there are several ways Amazon’s loss-leader pricing strategy could have depressed the output of both e-book and print books long-term. First, of course, once its monopoly was fully entrenched, Amazon could have sought to recoup its losses by raising its e-book prices above a competitive level. Second, if instead Amazon continued to cannibalize print sales through below-cost e-book pricing, publishers might have been forced to reduce the royalties they pay authors, giving those authors less reason to continue writing, thus reducing the output of all books. Again, these are the types of issues that require a full rule of reason analysis, not summary condemnation under the per se doctrine.

Were the price caps and most-favored nation clauses ancillary restraints that may have been reasonably necessary to the legitimate pro-competitive purposes of the common sales agent arrangement?

The ancillary nature of the terms that were included in Apple’s agency agreements with the publishers, and which the publishers may have agreed among themselves to accept, is equally easy to show.

The price caps on which Apple insisted were obviously designed to protect it from opportunistic behavior by the publishers in charging higher prices for their e-books than what Apple felt the market would accept, thereby preventing it from selling a sufficient volume of e-books to make its entry successful. Such opportunistic behavior by the publishers could also have made it harder to convince consumers to buy Apple’s new iPad, the success of which was critical to its future.

The most favored nation clauses on which Apple insisted, and which the publishers may also have agreed among themselves to accept, were likewise arguably necessary to protect Apple from the risk of having to compete against an established competitor offering lower prices than it could, thereby impeding its successful entry and damaging its goodwill with consumers.

In both cases, these are classic and legitimate reasons for ancillary restraints. Whether or not these particular restraints were reasonably necessary to Apple’s successful entry is a question that could only be decided on the basis of a full rule of reason analysis. All that is needed to avoid per se condemnation is that there be a plausible argument that they were, and that, again, should be something that no one could dispute.

* * *

Given the way the case was litigated, I recognize that it may be difficult to introduce at the Supreme Court level a whole new way of looking at the facts of the case. But if the Court does grant cert., I would hope that Apple and the amici supporting it would try to refocus the Court’s attention away from a sterile argument over whether the restraints in question were vertical or horizontal, and to focus it instead on whether they were a “naked” attempt to fix prices and restrict output or were instead ancillary to a pro-competitive business relationship.

 

 

 

 

 

 

 

Michael McCann (Vermont, CNNSI) has a very interesting column on developments in Ed O’Bannon’s lawsuit against the NCAA.   O’Bannon is challenging the NCAA’s licensing of the names, images and likenesses of former Division I college athletes for commercial purposes without compensation or consent.  McCann discusses the implications of O’Bannon’s motion to expand the class to include current players:

The prospect of O’Bannon v. NCAA radically reshaping college sports is real. If O’Bannon ultimately prevails, “student-athletes” and “amateurism” would take on new meanings in the context of D-I sports. While college athletes would still not obtain compensation for their labor, they would be compensated for the licensing of their identity. If O’Bannon instead extracts a favorable settlement from the NCAA, these athletes would likely be compensated as well.

Still, it’s early in the litigation process and, besides, the NCAA has a good record in court. The NCAA is sure to raise concerns about the new world of D-I college sports as envisioned by O’Bannon. For one, how a fund for current student-athletes is distributed and how former student-athletes are compensated will spark questions. Should star players get more? Would Title IX be implicated if male student-athletes receive more licensing revenue because they might generate more revenue than female student-athletes? Also expect some colleges and universities to bemoan that they cannot afford to contribute to player trusts unless they eliminate most of their teams and give pay cuts to coaches and staff. Along those lines, schools with large endowments or those with high revenue-generating teams may only become “richer” in a college sports world where certain schools have the financial wherewithal to compensate student-athletes while others do not.

Go read the whole thing.

 

 

The NCAA recently denied Todd O’Brien’s appeal to make use of the Grad Student Transfer Exception — which would allow O’Brien, who graduated St. Joseph’s with a degree in economics, to continue playing basketball while pursuing a graduate degree in Public Administration at University of Alabama-Birmingham.  St. Joe’s, apparently at the behest of a college basketball coach who appears to have has lost sight the purpose of college athletics, refused to allow O’Brien the exemption.  Its permission is required (and has apparently never been withheld in these circumstances).

O’Brien tells his story in a recent column at CNN-Sports Illustrated:

My name is Todd O’Brien. I’m 22 years old. In 2007, I became the first person from Garden Spot High (located in Lancaster County in New Holland, Pa.) to earn a Division I basketball scholarship. I attended Bucknell University from 2007 to 2008, where I made the Patriot League All-Rookie team. After the season, I decided the school and its basketball program weren’t the right fit for me. I wanted to follow the footsteps of my uncle Bruce Frank, a former Penn player, and play in the Big 5. I transferred and was given a full scholarship to play basketball at St. Joe’s for coach Phil Martelli. After sitting out in 2008-2009, I earned the starting center spot for the 2009-2010 season. Though our team struggled, I was able to start 28 games and led the team in rebounding. I also was the recipient of the team’s Academic Achievement award for my work in the classroom.

Entering the next season, I had aspirations of keeping my starting role, increasing my productivity on the court, and most importantly — winning more games. Off the court my goal was to continue getting good grades and to position myself to earn my degree studying Economics.

Things didn’t work out that way for O’Brien as the team struggled and St. Joe’s Coach Martelli opted to play younger players.  O’Brien increased his focus on academics, including graduate school options:
As the season went on things did not improve much, but on a brighter note I entered my last semester as an undergrad. On top of my regular classes, I had picked up an independent study internship at the Delaware County Municipal Building, where the focus of my study was on local economics.Though I still needed to pass three summer courses to officially earn my degree, I was allowed to walk in graduation that May. At the urging of my parents, my Economics advisor and other family friends, I began looking at graduate programs for the fall semester.

O’Brien ultimately decided he would take the summer courses, graduate early, and find a suitable graduate program.  Here is where things get ugly, according to O’Brien’s account:
I met with Coach Martelli to inform him that I would not be returning. I had hoped he would be understanding; just a few weeks before, we had stood next to each other at graduation as my parents snapped photo. Unfortunately, he did not take it well. After calling me a few choice words, he informed me that he would make some calls so that I would be dropped from my summer class and would no longer graduate. He also said that he was going to sue me. When he asked if I still planned on leaving, I was at a loss for words. He calmed down a bit and said we should think this over then meet again in a few days. I left his office angry and worried he would make me drop the classes.
A few days later I again met with Coach Martelli. This time I stopped by athletic director Don DiJulia’s office beforehand to inform him of my decision. I told him I would be applying to grad schools elsewhere. He was very nice and understanding. He wished me the best of luck and said to keep in touch. Relieved that Mr. DiJulia had taken the news well, I went to Coach Martelli’s office. I told him that my mind had not changed, and that I planned on enrolling in grad school elsewhere. I recall his words vividly: “Regardless of what the rule is I’ll never release you. If you’re not playing basketball at St. Joe’s next year, you won’t be playing anywhere.”
St. Joe’s never agreed to sign the release.  O’Brien appealed to the NCAA.  Here is his account:

With no movement on Saint Joseph’s end, my faith was left in the hands of a five-member NCAA committee. I pleaded my case, stating how St Joe’s was acting in a vindictive manner and how the NCAA must protect its student-athletes. When it was my turn to speak, I talked about how much it would hurt to lose my final season of college basketball, not just for me but for my parents, sisters and all of my relatives who take pride in watching me play. To work so hard for something, waking up at 6 a.m. to run miles on a track, spending countless hours spent in the gym shooting, and to have it all taken away because a head coach felt disrespected that I left in order to further pursue academics? It’s just not right.

Later that day the NCAA contacted UAB to inform the school that my waiver had been denied. The rules state that I needed my release from St. Joe’s, and I didn’t have it. I am the first person to be denied this waiver based on a school’s refusal. I was crestfallen. The NCAA has done a lot for me in life — I’ve gotten a free education, I’ve traveled the country playing basketball, and for all of this I am thankful. But in this instance I think they really dropped the ball. To deny a grad student eligibility to play based on the bitter opinion of a coach? You can’t be afraid to set precedent if it means doing the right thing.

My lawyer continues to plead to St Joe’s to release me, but the school no longer will discuss the issue. When my parents try to contact Coach Martelli, Don Dijulia, or President Smithson, they hide behind their legal counsel. When we try to contact the legal counsel, they hide behind the NCAA. A simple e-mail from any one of them saying they no longer object to me playing would have me suited up in uniform tomorrow, yet they refuse.

So here I am, several states away from home, practicing with the team every day, working hard on the court, in the weight room and in the classroom. I keep the faith that one day (soon, I hope) somebody from St. Joe’s will step up and do the right thing, so if that day comes I’ll be ready. I just finished my first semester of grad classes, and I enjoy it a lot. When somebody asked if I would be leaving to try to play overseas now that I’ve been denied the ability to play here, I said no. I said it before and I’m sticking to it — I’m here to get a graduate degree.

Whenever I get frustrated about the situation, I think back to something my mother told me on the phone one day. “This isn’t the end of basketball. Basketball ends when you want it to, whether that’s next year, in five years, or in 50 years. You control your relationship with the game, and nobody, not St. Joe’s, not the NCAA, can take that away from you.”

But right now, they sure are trying to.

If O’Brien’s account is even close to accurate, St. Joe’s — and especially Coach Martelli — should be ashamed of themselves.  As should the NCAA. The latter is nothing new.  But Coach Martelli and St. Joe’s has the opportunity to correct this — and they should.
Good luck to O’Brien.

Larcker & Tayan speculate, for example (footnotes omitted):

Researchers have long noted that the compensation of college football coaches has risen faster than the compensation of other university employees. According to one study, the compensation awarded to head coaches rose 500 percent between 1986 and 2007. By comparison, the compensation of university presidents rose 100 percent and the compensation of full professors only 30 percent over this period. Student athletes receive no compensation. As a result, the average head football coach of an NCAA Division I school earns three times the compensation of the average president, 17 times the salary of an assistant professor, and an infinite amount more than the average student athlete. The NCAA Act required that a university calculate and disclose these ratios for its own constituents.

They ask:

* If these requirements would not work in an athletic setting, should we expect them to work in business?
* Why are the governance provisions of Dodd-Frank legally required, rather than voluntarily adopted by individual companies?
* Why does Dodd-Frank place such emphasis on executive compensation and disclosure? Will its compensation requirements reduce governance failures?

Meese on Bork (and the AALS)

Thom Lambert —  22 December 2012

William & Mary’s Alan Meese has posted a terrific tribute to Robert Bork, who passed away this week.  Most of the major obituaries, Alan observes, have largely ignored the key role
Bork played in rationalizing antitrust, a body of law that veered sharply off course in the middle of the last century.  Indeed, Bork began his 1978 book, The Antitrust Paradox, by comparing the then-prevailing antitrust regime to the sheriff of a frontier town:  “He did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.”  Bork went on to explain how antitrust, if focused on consumer welfare (which equated with allocative efficiency), could be reconceived in a coherent fashion.

It is difficult to overstate the significance of Bork’s book and his earlier writings on which it was based.  Chastened by Bork’s observations, the Supreme Court began correcting its antitrust mistakes in the mid-1970s.  The trend began with the 1977 Sylvania decision, which overruled a precedent making it per se illegal for manufacturers to restrict the territories in which their dealers could operate.  (Manufacturers seeking to enhance sales of their brand may wish to give dealers exclusive sales territories to protect them against “free-riding” on their demand-enhancing customer services; pre-Sylvania precedent made it hard for manufacturers to do this.)  Sylvania was followed by:

  • Professional Engineers (1978), which helpfully clarified that antitrust’s theretofore unwieldy “Rule of Reason” must be focused exclusively on competition;
  • Broadcast Music, Inc. (1979), which held that competitors’ price-tampering arrangements that reduce costs and enhance output may be legal;
  • NCAA (1984), which recognized that trade restraints among competitors may be necessary to create new products and services and thereby made it easier for competitors to enter into output-enhancing joint ventures;
  • Khan (1997), which abolished the ludicrous per se rule against maximum resale price maintenance;
  • Trinko (2004), which recognized that some monopoly pricing may aid consumers in the long run (by enhancing the incentive to innovate) and narrowly circumscribed the situations in which a firm has a duty to assist its rivals; and
  • Leegin (2007), which overruled a 96 year-old precedent declaring minimum resale price maintenance–a practice with numerous potential procompetitive benefits–to be per se illegal.

Bork’s fingerprints are all over these decisions.  Alan’s terrific post discusses several of them and provides further detail on Bork’s influence.

And while you’re checking out Alan’s Bork tribute, take a look at his recent post discussing my musings on the AALS hiring cartel.  Alan observes that AALS’s collusive tendencies reach beyond the lateral hiring context.  Who’d have guessed?

The U.S. Department of Justice sued eBay last week for agreeing not to poach employees from rival Intuit. According to the Department’s press release, “eBay’s agreement with Intuit hurt employees by lowering the salaries and benefits they might have received and deprived them of better job opportunities at the other company.” DOJ maintains that agreements among rivals not to compete for workers have long been deemed per se illegal. (Indeed, Google, Apple, Adobe, and Pixar quickly settled antitrust claims based on similar non-poaching arrangements in 2010.)

DOJ is right to attack this type of arrangement. Apart from harming individual employees, non-poaching agreements occasion a societal harm: They preclude labor resources from being channeled to their highest and best uses. To poach a competitor’s star employee, you must offer to pay that employee more than she’s currently making (or otherwise adjust the terms of her employment in a way she deems desirable). Her current employer will usually have a chance to counter your offer. If you win the bidding war, it’s likely because the current employer’s willingness-to-pay for the employee—an amount reflective of the degree by which the employee enhances her firm’s value—is less than yours. If you can derive more value from the employee, you should have her. When employers agree to limit competition for workers, they preclude labor resources from flowing to their highest and best ends, causing an “allocative inefficiency.”

So perhaps DOJ should go after the members of the Association of American Law Schools. Pursuant to a Statement of Good Practices to which AALS members scrupulously adhere, each law school has agreed to limit competition with its rivals by refraining from making lateral offers of employment after March 1 each year. Unlike the eBay/Intuit arrangement, the competing law schools’ trade restraint is applicable for only part of the year–from March 1 until the fall hiring season–but it has the same basic effect as the eBay arrangement. And, despite the law schools’ claims to the contrary, it isn’t justified on efficiency grounds.

By preventing law professors from credibly threatening to leave their existing employers after March 1, the AALS restraint significantly reduces professors’ ability to negotiate higher wages or more favorable employment terms. If you announce a competing school’s offer six weeks before fall classes start, you’re much more likely to receive an attractive counter-offer from your current employer than you would be if you sprang the news of your potential departure six months before the start of classes, when you’re more easily replaced. What’s more, law schools generally don’t tell professors what they’ll be earning the following year until after March 1, when it’s too late for a disgruntled professor to secure another offer elsewhere. The AALS restraint thus artificially depresses the salaries of a school’s most desirable professors.

Now this might not seem like something to get worked up over. Most people think law professors are a spoiled lot. They have relatively low teaching loads and, despite the fact that most lack PhDs, they generally earn a good deal more than most academics. Why should DOJ intervene on behalf of these fat cats? Because the law schools’ non-poaching arrangement diminishes the quality of legal education. Here’s why.

At most law schools, where equality of end-states tends to be fetishized, professors are generally compensated in lock-step according to seniority. There’s some variation, but apart from endowed positions, starting salaries and annual raises are around the same level for everyone.

Talent and effort, by contrast, are not evenly distributed. Most law schools have some super-stars who are exceptional teachers and scholars, a number of “solid” professors who put in their time and provide competent teaching and enough scholarship to stay engaged, and a fair bit of dead weight. Lock-step compensation depresses the incentive to move into the first category and enhances the attractiveness of the last. It’s favored by administrators, though, because it permits them to avoid awkward conversations about merit.

If late-in-time departures of professors were a real possibility, administrators would have a stronger incentive to keep their most productive folks happy. They could stand to lose teachers with low course enrollments, so they probably wouldn’t worry too much about keeping their salaries relatively high. They’d also know that their less productive scholars are unlikely to receive a late offer. But highly productive scholars who also provide lots of the thing the law school is ultimately selling–law teaching–would likely begin to earn higher salaries than their less valuable colleagues. With compensation more accurately reflecting the value professors provide, labor resources would be allocated more efficiently. And, of course, law professors would have an increased incentive to make themselves both “poachable” and indispensable by firing on all cylinders–teaching, scholarship, and service.

But don’t the law schools need their non-poaching arrangement in order to prevent scheduling disorder that would hurt students? That’s certainly what they claim. The “Statement of Good Practices” memorializing the law schools’ collusive agreement begins:

[T]he departure of a full-time law teacher always requires changes at the law school. Unless the school is given sufficient time to make the necessary arrangements to find another to offer the instruction given by the departing teacher, the reasonable expectations of students will be  frustrated and the school’s educational program otherwise disrupted. To serve  the best interests of the program of legal education from which the teacher is departing and that to which she or he may be going, the Association urges that law schools and law faculty members follow these suggested practices….

A horizontal restraint of trade, though, isn’t necessary to prevent the sort of harm the law schools envision. If a law school believes it needs some amount of lead time to prepare for a professor’s departure, it may unilaterally negotiate contracts with its professors obligating them to provide a certain amount of notice before any departure and specifying liquidated damages for breach. Unlike the “one-size-fits-all” AALS restraint, such contracts could accommodate heterogeneous needs and preferences. For example, required lead times and the amount of liquidated damages could vary based on the location of the school (urban with lots of adjunct possibilities vs. rural with few), the degree to which the professor’s course offerings require a specialized background (Securities Regulation vs. Contracts), and the pedagogical importance of the courses (Business Organizations vs. Law & Literature). Moreover, this contractarian approach, unlike the AALS’s horizontal restraint, would further allocative efficiency across law schools: If Raider Law is willing to pay Target Law’s hot professor an amount that will increase her salary and cover the liquidated damages she owes Target because of an untimely departure, then Raider must value her more than Target and should get her. Thus, it is possible to achieve the practical benefit the AALS restraint purports to pursue without using a horizontal restraint and in a manner that permits allocative efficiency.

A horizontal agreement not to compete should not be allowed to stand when a less restrictive, easily achieved vertical option could secure the retraint’s benefits. See, e.g., Maricopa County Med. Soc’y (condemning an efficiency-enhancing maximum price-fixing agreement among physicians and observing that the procompetitive benefit occasioned by the restraint could be achieved via vertical agreements rather than a horizontal restraint); NCAA (refusing to allow the need for competitive balance to immunize a naked horizontal restraint because such balance could be achieved less restrictively); cf. Professional Engineers (horizontal agreement not to engage in price negotiations in order to assure high-quality engineering illegal when substantive quality standards could achieve same result).

Perhaps one day the DOJ will acknowledge that American law schools are competitors and, for the benefit of law students and the legal profession, ought to act like it.

Exclusion and the BCS

Hal Singer —  7 November 2011

Every year around this time—around week 10 of college football season—we are reminded of the inequity of the Bowl Championship Series (BCS) system. Instead of permitting an open playoff system to determine the college football champion, as is done by most other NCAA sports including Division II football since 1973, and more famously, NCAA basketball, the BCS uses a computer algorithm and polls to decide the contestants according to, among other things, regular season performance, the teams’ conferences (BCS-approved or not), and strength of schedule. In particular, six of the ten BCS playoff slots are set aside for teams from BCS conferences.

While choosing the best team in the country is relatively easy, choosing the second-best team is highly controversial, as the second-best team will have some warts. Going into the ninth week of the season, here is a look at the BCS standings: LSU (.9931), Oklahoma State (.9447), Alabama (.8836), Stanford (.8749), and Boise State (.8473). Despite losing at home to LSU this weekend, Alabama is BCS-ranked above undefeated Stanford and Boise State.

In today’s Washington Post, columnist John Feinstein makes a compelling antitrust argument against the BCS:

But here’s the real nightmare scenario for the boys of the Bogus Championship Series: Oregon beats Stanford; Oklahoma beats Oklahoma State. That’s when the BCS apologists will start screaming for an LSU-Alabama rematch.

Is Boise State better than Alabama? Who knows? If college football were a real sport with a real playoff system or tournament, we might get a chance to find out. But you can bet all the TV money in the world that if you were to acquire [Alabama’s head coach] Nick Saban’s cellphone records you wouldn’t ever find a call to the 208 area code to set up a home-and-home with Boise State.

That’s why the money-huggers who argue that Boise’s schedule doesn’t make it worthy of playing for the championship have no argument at all. All of the so-called big-time schools who have played Boise in recent years — Georgia, Virginia Tech and Oklahoma come to mind — have lost. In fact, Boise’s only two losses in the last four years were to TCU and Nevada, who also aren’t worthy of playing for anything meaningful, according to the money men.

What Mr. Feinstein has articulated sounds very much like a coordinated refusal to deal by BCS conferences and their schools against Boise State (and perhaps against TCU in prior years) to maintain their share of the profits generated from post-season Division I football. In economic parlance, a non-BCS team’s strength of schedule—the key factor cited by BCS teams to support exclusion from sharing in the prize—depends on the willingness of BCS teams collectively to schedule games against the attacker. Proving coordinated refusals to deal are quite difficult—the inquiry concerns whether each participant would find it in its unilateral interest not to schedule games with tough non-BCS teams in the absence of the alleged conspiracy—but I am confident that several economists (including your fearless writer) would line up to correct this inequity.

One might argue that no BCS team has an incentive to schedule a tough non-conference opponent, for fear of adding a loss to its record. To this I say poppycock: Bubble teams—teams from weak BCS conferences (like the ACC or Big East) or teams at the bottom of a strong BCS conference (like the SEC)—seek a tough non-conference opponent to bolster their conference victories. In contrast, a team at the top of the SEC simply needs to win its conference. That Virginia Tech (of the weak ACC) and Georgia (at the bottom on the SEC) invited Boise State to play in 2010 and 2011, respectively, does not disprove Feinstein’s conspiracy theory—those teams needed to prove something. Better evidence would be an invite from LSU or Alabama. But alas, those teams seem to schedule tough non-conference games with BCS conference teams. LSU invited Oregon (Pac 10, BCS) and West Virginia (Big East, BCS) this year. It would be good for football—and the competitive process generally—if these non-conference invitations were made irrespective of the opponent’s conference (BCS conference or not).

1.  Do the Merger Guidelines Need Revision?

Yes.  Conceptually, the current Guidelines incorporate multiple strands of intellectual and legal history with respect to merger analysis that have been layered one upon the other over time, but never effectively integrated.  This now encumbers the application of the Guidelines and may be inhibiting the government’s capacity to effectively and efficiently initiate merger challenges.

The current Guidelines remain strongly tethered to the “structural” school, with roots in the 1950s.  The influence of the structural school was evident in both the Philadelphia National Bank presumption and the 1968 Guidelines, and the 1982-97 Guidelines have retained the essential features of that tradition — reliance on market definition, market share calculation, and inferences about market power drawn from those shares.

The 1982 Guidelines also began the process of layering on top of that tradition, injecting elements of the “new learning,” which focused largely on expanding upon General Dynamics and the various bases for rebutting a structural case, and oligopoly theory.  As the Guidelines further evolved through 1997, various dimensions of oligopoly theory were added, especially in the sections on anticompetitive effects, reflecting the work of Stigler, Nash, Cournot, and Bertrand.  Yet additional economic thinking was inserted in the revised and expanded discussions of entry and efficiencies.  Today’s Guidelines, therefore, are an intellectual collage of various traditions in law and economics.

2. If yes, what is the most important revision that you would recommend and why?

Although it is a tall order, the agencies could undertake to clarify the overall conceptual framework of the Guidelines.  Currently, even though it does not describe actual agency practice, the Guidelines are perceived by courts as outlining a linear process, in which its five steps are mechanically undertaken in sequence, each proceeding only after the previous step is completed.  This in effect makes structural analysis a prerequisite to the evaluation of every merger and it impairs reliance on any other approach to evaluating likely anticompetitive effects or efficiencies more directly.  This approach wrongly elevates the status of market definition above competitive effects, which is the core concern of merger analysis – indeed of all antitrust analysis.

A related goal would be to harmonize the intellectual underpinnings of merger analysis with other areas of antitrust law.  This is especially important with respect to courts’ willingness to rely on direct effects evidence since the Supreme Court’s decisions in NCAA and Indiana Fed’n of Dentists.  Depending on the kind of evidence available, unilateral effects theory can be understood as an application of the direct effects approach to mergers.  In cases like Staples, for example, where natural experiments provided a basis for predicting the likely future effects of the merger, it is a sort of “predicted actual effects” doctrine.  As with NCAA and Indiana Fed’n of Dentists, in such cases defining markets and inferring market power indirectly should be understood as a surrogate that is unnecessary when more direct and more reliable indications of future market power are available.

A third and also related goal might be to more openly acknowledge that the Guidelines influence how courts assign burdens of production and proof.  It has become tradition for all government Guidelines to pronounce that they are not intended to specify burdens of proof or production; that instead, they simply outline the government’s internal processes for exercising prosecutorial discretion. But these assertions are at odds with actual practice once the government enters the courthouse.  The Merger Guidelines have been read to specify burdens: Steps 1 and 2 (market definition and anticompetitive effect) shift the burden to the defendant, who can then seek to rebut the prima facie case based on entry, efficiencies, or a failing firm defense.  And courts such as the D.C. Circuit in Baker Hughes and Heinz, have promoted the use a “sliding scale” to establish variable-strength presumptions and to evaluate burdens, often relying heavily on structural evidence as a burden shifter, a tradition rooted in Philadelphia Nat’l Bank.  Given that the Guidelines are applied this way, the agencies should consider saying a bit more about what should be sufficient to shift a burden of production in either direction and whether certain kinds and quantities of evidence shift a burden more emphatically than others.

The specification of burdens also has implications for the welfare standard being used to assess mergers.  This is most obvious in the efficiencies discussion, which currently tries to nuance the issue.  The text strongly suggests a commitment to a consumer welfare standard defined as giving greater weight to consumer surplus.  But there is a hint of equivocation in footnote 37, which contains some support for the argument that aggregate welfare may be a relevant consideration.  More clearly specifying the relative burdens of production could eliminate any remaining ambiguity regarding the welfare standard.  Although it is unlikely that very many cases would be influenced by the choice of a consumer welfare or aggregate welfare standard, the courts have generally applied the consumer welfare approach now dominant in the Guidelines and this should be more clearly acknowledged.

Finally, post-consummation merger challenges have become more common and yet the Guidelines are focused entirely on making predictions about likely future effects.  The agencies might consider either adding a section on post-consummation mergers or generating a separate guidance document that would do so.  The goal would be to explain how the post-consummation analysis of a merger might differ from those done pre-merger.  This again highlights the need to integrate thinking about the role of actual effects evidence, which becomes more central in post-consummation challenges.  Such a discussion also could include consideration of limited reliance on abbreviated or “quick look” types of analysis to shift burdens in appropriate post-consummation cases and reduce the costs of merger review.