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Antitrust UCL and Privacy

That’s The Ticket – Game On For Plaintiffs Challenging Suppression of the Market For Football Broadcasts

In re: National Football League’s “Sunday Ticket” Antitrust Litig., — F.3d —-, No. 17-56119, 2019 WL 3788253 (9th Cir. Aug. 16, 2019) [Sunday Ticket]

Lesley E. Weaver, Anne K. Davis, and Joshua S. Samra
Bleichmar Fonti & Auld LLP

SUMMARY

Sunday Ticket, a putative antitrust class action by commercial and residential DirecTV subscribers (hereinafter, the “Plaintiffs”) on appeal to the Ninth Circuit from the Central District of California’s dismissal, alleges that the out-of-market game telecasting arrangements between the National Football League (“NFL”), the individual teams (“NFL Teams”), and DirecTV—working together—suppress competition for the sale of live telecasts of NFL games in violation of Sections 1 and 2 of the Sherman Act, resulting in decreased choice and increased costs to consumers.

The panel, comprised of Circuit Judges Sandra S. Ikuta and N. Randy Smith and George Caram Steeh III, United States District Judge for the Eastern District of Michigan, reversed the district court’s dismissal.

Judge Ikuta, writing for the panel, held that the Plaintiffs described prima facie antitrust violations: “[b]ecause the complaint alleges that the interlocking agreements in this case involve the same sorts of restrictions that NCAA v. University of Oklahoma concluded constituted an injury to competition.” (Sunday Ticket at *9.), suggesting but not stating that a quick look approach to the rule of reason analysis might apply. The Ninth Circuit also concluded that the Plaintiffs were not required to establish a relevant market “because the alleged restrictions on the production and sale of telecasts constitute[d] ‘a naked restriction’ on the number of telecasts available for broadcasters and consumers …” (Id.) Likewise, the majority concluded that the Plaintiffs had standing to challenge the agreements between the NFL Teams and the NFL under the co-conspirator exception to the standing limitation set forth in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977): “if the direct purchaser conspires to limit the output that will ultimately be available to the plaintiffs, then the plaintiffs are directly impacted by the output limitation and have standing to sue.” (Sunday Ticket at *13, citing Apple Inc. v. Pepper, et al., Case No. 17-204 (May 13, 2019).) Judge Smith dissented on the issue of standing, writing that under Supreme Court and Ninth Circuit precedent, indirect purchasers like the Plaintiffs cannot use a pass-on theory of antitrust injury, and that the co-conspirator exception does not apply to an output-restriction conspiracy. (Id. Dissent at *15.)

Defendants have petitioned for en banc review.

BACKGROUND

Starting in 1951, the NFL sought to limit individual teams’ right to independently license the broadcast rights of their games. The NFL amended its bylaws to require that each NFL team agree to prevent the telecasting of outside games into the home territories of other teams when those other teams are either at home or away. (U.S. v. Nat’ Football League, 116 F. Supp. 319 (E.D. Pa. 1953)

[hereinafter NFL I]

.) This amendment spurred the Justice Department to file suit alleging that the bylaw violated Section 1 of the Sherman Act and seeking to enjoin the NFL from enforcing the agreement.In NFL I, Judge Grim of the Eastern District of Pennsylvania held that the NFL could restrict the broadcast of away games in home territories (e.g. the Eagle’s away game being televised in Philadelphia) because the restriction would help maintain ticket sales. However, Judge Grim held that the NFL could not restrict teams from broadcasting games into another team’s local market when that team was playing away games. ( Id. at 326-27, 330.)

Ten years later, facing rising competition from the American Football League (“AFL”), the NFL sought to implement a new contract between the NFL and CBS whereby “each club will pool its television rights with those of all of the other clubs, and that only the resulting package of pooled television rights will be sold to a purchaser.” (U.S. v. Nat’l Football League, 196 F. Supp. 445, 447 (E.D. Pa. 1961) [hereinafter NFL II].) The NFL filed a petition with Judge Grim to limit the existing injunction and allow the implementation of this contract agreement. Judge Grim denied the petition because the agreement would have eliminated competition amongst the teams in the sale of television rights. (Id.)

Following Judge Grim’s decision in NFL II, the NFL sought passage of an exemption to the Sherman Act: the Sports Broadcasting Act (“SBA”), which passed in 1973. The SBA effectively overruled NFL II, providing that professional sports leagues that act collectively to sell or transfer sponsored telecasting rights are exempt from Section 1 of the Sherman Act. (15 U.S.C. § 1291.)

Like the NFL, the National Collegiate Athletic Association (NCAA) had long restricted broadcasting rights of teams’ games. Beginning in the 1950s, the NCAA enforced procedures limiting the broadcasting appearance of university teams in each season. In the 1980s, colleges sought to challenge this policy as violating the Sherman Act. In NCAA v. Board of Regents of University of Oklahoma, 468 U.S. 85 (1984), the Supreme Court struck down the NCAA’s agreement as violating the Sherman Act because the agreement created a horizontal restraint on trade that limited competition, creating higher prices and a lower number of broadcast games. (468 U.S.at 99, 106-107.) Following the Court’s opinion in NCAA, the number of televised NCAA games has increased, as have revenues from telecasting.

 “SUNDAY TICKET” PROCEDURAL HISTORY

In mid-2015, numerous individual and business subscribers to DirecTV’s “NFL Sunday Ticket” package filed putative antitrust class actions in the United States District Courts for the Central District of California and the Southern District of New York. The actions followed the NFL’s and DirecTV’s October 2014 announcement of the extension of DirecTV’s exclusive broadcast rights for out-of-market NFL games. Plaintiffs alleged that the arrangements between the NFL Teams, the NFL, and DirecTV resulting in DirecTV’s exclusive broadcast rights to out-of-market games created artificially high subscription fees for the Sunday Ticket package, in violation of the Sherman Act.

In December 2015, the Judicial Panel on Multidistrict Litigation ordered 27 actions consolidated and transferred to the Central District of California before Judge Beverly Reid O’Connell. A consolidated complaint was filed in June 2016, asserting claims on behalf of a Commercial Class of DirectTV subscribers, and a Residential Class of DirectTV subscribers. On August 8, 2016, the NFL Defendants filed a Motion to Dismiss, arguing that, inter alia, under the SBA the NFL is immune from antitrust scrutiny and that the Plaintiffs lack standing to challenge the agreements between the NFL Teams and the NFL because they are indirect purchasers. On that same day the DirecTV Defendants filed a Motion to Compel Arbitration.

On June 30, 2017, the district court granted the NFL Defendants’ motion to dismiss with prejudice while denying the DirecTV Defendants’ motion to compel arbitration as moot.[1] In re Nat’l Football Leagues Sunday Ticket Antitrust Litig., 2017 WL 3084276 (C.D. Cal. June 30, 2017), rev’d sub nom. In re Nat’l Football League’s Sunday Ticket Antitrust Litig., No. 17-56119, 2019 WL 3788253 (9th Cir. Aug. 13, 2019.)

The district court held that the Plaintiffs’ Section 1 claim failed because the complaint did not adequately allege the existence of a market or submarket in which the NFL Defendants have the power to artificially control pricing or in which selling the rights on the open market would prevent artificially inflated pricing. (Id.) Because the Plaintiffs failed to adequately plead antitrust injury under Section 1, the Section 2 conspiracy to monopolize claim also failed: “[T]he fact that the NFL has a practical monopoly on professional football in the United States is not sufficient to establish that they may be liable under section 2 for a conspiracy to monopolize.” (Id). And in any event, without antitrust injury, the Plaintiffs lacked standing to challenge the arrangement. (Id.) The district court could see “no way in which Plaintiffs could amend their Complaint to state a claim without contradicting their current allegations,” so the Plaintiffs’ claims were dismissed with prejudice. (Id. at 20.)

ARGUMENTS ON APPEAL

On appeal, the Plaintiffs argued in pertinent part that the district court misapplied the rule of reason and erred by considering the horizontal agreement between the individual teams and the NFL and the vertical agreement between the NFL and DirecTV as independent agreements subject to standalone analysis, rather than interdependent agreements forming a single anti-competitive arrangement. (Pls. Br. at 21.) Here, Plaintiffs argued the horizontal agreement between the NFL and the teams and the vertical agreement between the NFL and DirecTV are designed to work together to restrain telecast output, enabling DirecTV to charge supracompetitive prices. In considering the vertical agreement as a standalone, Plaintiffs argued that the district court ignored DirecTV’s participation in the horizontal agreement between the NFL and the individual teams through which the parties agreed to limit the broadcast of games through other means, such as over the Internet. (Id. at 29.) The NFL Defendants, on the other hand, argued that the district court correctly analyzed the respective vertical and horizontal agreements under the appropriate antitrust frameworks, properly holding that the exclusive distribution agreement between the NFL and DirecTV was presumptively legal and rejecting Plaintiffs’ allegations of harm to competition arising from the agreements between the NFL Teams and the NFL. (NFL Br. at 29-41.)

The Plaintiffs asserted that additional error flowed from the district court’s standalone analysis of the agreements, including its holding that the vertical agreement between the NFL and DirecTV is not anticompetitive because “output” is not reduced due to the fact that a telecast is produced of every out-of-market game, regardless of cost or accessibility. (Pls. Br. at 31-34.) Using the number of games available as the measure of output does not make sense in the instant case, Plaintiffs argued, because unlike in NCAA, it is not the number of telecasted games restricted by agreement; it is the number of game telecasts, which affects accessibility and cost of viewing the games. (Id. at 32-33.) In the absence of the restraints resulting from the arrangements between the teams, the NFL, and DirecTV, Plaintiffs assert there would be more distributors of out-of-market games, teams could form individual arrangements with broadcast partners resulting in competing telecasts, and viewership would increase while prices would decrease. Rather than considering the world that would result today in the absence of these arrangements, Plaintiffs assert the district court erred by considering the world that existed prior to the first exclusive arrangement with DirecTV in 1994, when out-of-market telecasts were not available at all. (Id. at 34.)

Similarly, the Plaintiffs argued that the district court erred by effectively nullifying the SBA’s limitation to over-the-air (sponsored) broadcasts and holding that the horizontal agreements between the teams and the NFL are not subject to antitrust scrutiny as a matter of law. (Id. at 46-53.) This was in error, the Plaintiffs said, because the district court assumed the legality of the very arrangement that the Plaintiffs’ challenge—the agreement between the teams and the NFL to pool their broadcast rights for out-of-market games. (Id.) Under American Needle, Plaintiffs explained, teams “cannot simply get around antitrust liability by acting through a third-party intermediary or ‘joint venture’.” (Id. at 48, quoting Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 202 (2010) (citations omitted).) And while the Plaintiffs acknowledged the need for some cooperation to telecast the games, it is that need that results in the application of the rule of reason rather than per se illegality.  It does not mean that all cooperation is lawful. (Id. at 50.)

Countering Plaintiffs’ arguments, the NFL Defendants argued that the agreements were actually pro-competitive, in that the telecasts required collective and cooperative action for the games to be telecast at all, and in any event were exempt from the Sherman Act based on the SBA. (NFL Br. at 14, 41.)

With respect to the relevant markets, Plaintiffs first asserted that they need not plead a market because, under NCAA, defining a market in which defendants have market power is not required where defendants have put in place explicit restraints on output. (Pls. Br. at 54.) Further, Plaintiffs argued that dismissing on the basis of a failure to establish market definition is inappropriate because market definition is a deeply fact intensive inquiry. (Id. at 55.) Instead, Plaintiffs asserted that they adequately described both a market (the market for live telecasts of professional football games) and a submarket (the market for out-of-market football telecasts carried through Sunday Ticket). (Id. at 56-7.) The NFL Defendants, on the other hand, asserted that Plaintiffs’ efforts to define the market to encompass only out-of-market games fails, not only because it constitutes a form of market gerrymandering, encompassing only the complained about behavior, but because Plaintiffs failed to address whether NFL games are substitutes for one another. (NFL Br. at 21.)

Plaintiffs contended that the district court improperly dismissed their Section 2 claims for the same reasons it erred in dismissing their Section 1 claims, and for the additional reason that it improperly held that Plaintiffs failed to plead the NFL Defendants’ specific intent to unreasonably restrain competition. (Pls. Br. at 61-63.) Here, Plaintiffs argued, the entire purpose of the agreements between the teams, the NFL, and DirecTV was to restrain competition in a manner made possible by the NFL’s monopoly on professional football in the United States. (Id. at 63.) In contrast, the NFL Defendants reasserted their claim that their conduct is both pro-competitive and protected by the SBA. (NFL Br. at 71.)

As for standing, Plaintiffs asserted that whether they are direct or indirect purchasers, they have standing to challenge the horizontal agreements because they seek injunctive relief as well as damages, thus Illinois Brick’s limitation on seeking passed-through damages does not apply. (Pls. Br. at 64.) Further, given the impact of the horizontal agreement on the competitive effects of the NFL’s agreement with DirecTV, challenging the horizontal agreement is necessary, Plaintiffs argued. (Id. at 65.) Where a vertical agreement is made possible only as a result of an underlying horizontal agreement, it makes no sense to foreclose pursuit of the damages resulting from the vertical agreement.

The district court further erred in its ruling on standing, the Plaintiffs averred, because it misconstrued Plaintiffs’ claims to describe a pass-on theory of injury. (Id. at 67.) Plaintiffs’ injury resulted not from the NFL’s injury to DirecTV through the NFL’s overcharge of DirecTV, but from DirecTV’s exploitation of the monopoly granted to it by the NFL, made possible by the underlying horizontal agreement between the teams and the NFL. (Id. at 68-69.) Thus, Plaintiffs asserted, the interconnected agreements work to benefit the NFL and DirecTV while restricting competition and harming Plaintiffs. (Id. at 70-71.)

The NFL Defendants, on the other hand, asserted that the indirect purchaser rule of Illinois Brick is a bright line rule barring indirect purchaser claims, subject to limited exceptions, including those relating to price-fixing conspiracies not applicable here. (NFL Br. at 69-70.)

THE NINTH CIRCUIT’S OPINION

The panel overturned the district court’s decision and held that the Plaintiffs’ allegations stated a prima facie Section 1 claim under the rule of reason because the agreements at issue were similar to the types of agreements that “have historically required an exemption from antitrust liability by the SBA …” (Id. at *8.) The court reasoned that because the interlocking agreements between the NFL Teams, the NFL, and DirecTV involve the same sorts of naked restrictions that the Supreme Court concluded constituted an injury to competition in NCAA, Plaintiffs plausibly alleged that the interlocking agreements caused injury to competition, and Plaintiffs were not required to establish relevant market. (Sunday Ticket at *9.)

The panel rejected the NFL Defendants’ argument that the horizontal agreements between the NFL Teams and the NFL and the vertical agreement between the NFL and DirecTV should be separately analyzed, following In re Musical Instruments & Equipment Antitrust Litigation, 798 F.3d 1186 (9th Cir. 2015). Defendants argued that under Musical Instruments, the NFL-DirecTV agreement is a presumptively legal exclusive distribution agreement. Not so, reasoned the panel, because under NCAA, both horizontal and vertical agreements involving league sports are analyzed under the rule of reason, which requires a holistic look at whether the interlocking agreements impact competition. (Sunday Ticket at *9.)

Similarly, the panel rejected the NFL Defendants’ assertion that the agreements are actually pro-competitive, because in the absence of cooperation amongst the NFL Teams competing in each game, the NFL, and the broadcaster, the games would not be telecast at all. (Id. at *10.) The court–noting the absence of a legal requirement for coordination by the NFL Teams, NFL, and broadcasters–looked to both the history of the NFL with respect to telecasts, current NFL practice with respect to other forms of media, and the practices of other professional sports leagues; the panel rejected  the NFL Defendants’ argument that telecasts could only be created through cooperation amongst competitors. (Id. at *11.)

The panel also rejected Defendants’ argument that the NFL-DirecTV agreement did not function to reduce output, because, from the supply side, every NFL game is broadcast to the public over free television in the game’s respective local market; and from the demand side, the number of unique viewers is the largest of any professional sports leagues. Rather, for purposes of determining antitrust injury, the panel concluded that the measure of output is the number of telecasts of out-of-market games, not the number of NFL games telecast. (Id.)

The majority further held that the Plaintiffs have standing to challenge the Teams-NFL Agreement, rejecting the NFL Defendants’ argument that Illinois Brick and the Ninth Circuit’s ruling in In re ATM Fee Antitrust Litigation, 686 F.3d 741 (9th Cir. 2012) precludes standing in this case. The majority held  that Illinois Brick’s direct purchaser ruledid not apply here to prevent Plaintiffs from challenging the agreement between the NFL Teams and the NFL because the rationale underlying the co-conspirator exception applicable price-fixing conspiracies was equally applicable to output-restricting activities—that “when co-conspirators have jointly committed the antitrust violation, a plaintiff who is the immediate purchaser from any of the conspirators is directly injured by the violation.” (Id. at 12.) Here, the Plaintiffs alleged that their injury was caused by a single interlocking conspiracy among the NFL Teams, the NFL, and DirecTV to restrict output by limiting the production of telecasts to one per out-of-market game, resulting in antitrust injury to the Subscribers. Thus, the majority held: “Even though DirecTV is the immediate seller to the plaintiffs, the plaintiffs’ allegation that they were directly injured by the conspiracy among the NFL teams, the NFL, and DirecTV is sufficient to allege antitrust standing for purposes of surviving a motion to dismiss.” (Id.)

THE DISSENT

The dissent, written by Judge Smith, asserted that the Plaintiffs lacked standing to challenge the NFL Teams-NFL agreement because they are indirect purchasers of game telecasts and alleged an output-restricting conspiracy rather than a price-fixing conspiracy.[2] (Id. Dissent at *15.) The dissent argued that the majority was mistaken in concluding that the rationale underlying the co-conspirator exception to Illinois Brick is equally applicable to output restriction conspiracies as to price fixing conspiracies, stating that the Ninth Circuit had already rejected that outcome in ATM Fee. (Id.)It is not the presence of anyconspiracy resulting in antitrust injury that determines whether the co-conspirator exception applies, Smith argued, but whether the theory of injury asserted depends on a pass-on theory of damages. (Id. Dissent at *16.)Here, Smith explained, the initial overcharge occurred between the manufacturer (the NFL) and the distributor (DirecTV), with DirecTV attempting to recoup its overpayment by passing costs through to the consumer. To calculate damages in this circumstance would require the court to engage in the very inquiry prohibited by Illinois Brick—whether there was an overpayment by DirecTV; if so, how much; and how much was passed on to consumers. Because in Smith’s view, the Plaintiffs rely on a pass-on theory of damages, and do not allege a conspiracy to fix the price charged to consumers, the co-conspirator exception to Illinois Brick cannot apply here. (Id. Dissent at *17.)

TAKEAWAY

The Sunday Ticket decision clarifies—for now—the Ninth Circuit’s view on the scope of the co-conspirator exception to Illinois Brick, namely that it rises or falls on the presence or absence of a conspiracy resulting in antitrust injury, not on whether or not the injury stems from a price-fixing conspiracy. The panel’s holding that the interlocking agreements as described constitute a prima facie antitrust violation implies that the district court should take the “quick look” approach to the rule of reason. The NFL Defendants filed their petition for rehearing en banc on August 27, 2019, asserting that the panel majority’s holding on standing presents an intra-Circuit conflict with ATM Fee, and directly conflicts with Illinois Brick. The NFL Defendants also call into question the panel’s treatment of agreements between the NFL Teams and the NFL, arguing that such agreement should have been analyzed under the full rule of reason, using standards applicable to the licensing of jointly created intellectual property as articulated in American Needle, rather than under NCAA’s quick look. Similarly, the NFL Defendants assert that the panel’s holdings on relevant markets and competitive effects are in conflict with Ninth Circuit precedent.[3]


[1] The district court sealed its opinion but filed a dismissal order clearing the league and DirecTV of all claims.

[2] Judge Smith acknowledged that the Plaintiffs have standing to challenge the horizontal agreements between the NFL Teams and the NFL to the extent that they seek injunctive relief.

[3] Notably, on October 12, 2017, presiding district court Judge O’Connell tragically died from a brain aneurysm.  If the case is remanded, the Panel on Multidistrict Litigation will appoint a new district court judge to oversee the proceeding.

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