Harrison (Buzz) Frahn, Caitlyn Chacon, Marissa Lambert
Simpson Thatcher & Bartlett LLP
On November 4, 2017, Judge Margo Brodie of the Eastern District of New York denied the North American Soccer League, LLC’s (“NASL”) request for a preliminary injunction blocking the United States Soccer Federation, Inc.’s (“USSF”) revocation of NASL’s Division II league status for the 2018 professional soccer season. NASL claimed that the preliminary injunction would resolve “the immediate prospect of being driven out of existence as a competitor,” while the court decided whether to grant declaratory relief and a permanent injunction striking down USSF’s Professional League Standards (“PLS”)—requirements and standards for professional soccer leagues seeking Division I, II, or III designation in the U.S. N. Am. Soccer League, LLC v. U.S. Soccer Fed’n, Inc., No. 1:17-cv-5495, 2017 WL 4159787, ¶ 12 (E.D.N.Y. Sept. 19, 2017) (“Cmpl.”). The crux of NASL’s complaint is that USSF adopted and applied the PLS in an anticompetitive manner as part of a conspiracy to entrench Major League Soccer (“MLS”), USSF’s business partner, as a monopolist in the relevant market for top-tier men’s professional soccer leagues located in the U.S. and Canada. Id. ¶ 4. In denying the preliminary injunction, Judge Brodie determined that NASL established three of the essential factors for relief—irreparable harm, balance of hardships, and the public interest—but that it failed to demonstrate the fourth: a “clear showing” of entitlement to relief. N. Am. Soccer League, LLC v. U.S. Soccer Fed’n, Inc., No. 17-cv-05495 (MKB), 2017 WL 5125771, at *1 (E.D.N.Y. Nov. 4, 2017). With respect to this fourth element, the court found that the adoption and implementation of the PLS by USSF was not sufficient on its own to show concerted action under Section 1 of the Sherman Act. Id. at *10–11. Further, in applying a rule of reason analysis, the court held that USSF met its burden of offering evidence of PLS’ procompetitive benefits and that NASL failed to offer less restrictive alternatives. Id. at *18–20.
NASL, a professional men’s soccer league comprised of seven teams operating in the U.S. and Canada, asserted Section 1 and 2 Sherman Act claims against USSF, a membership organization of professional soccer leagues and the governing body for professional soccer in the U.S. The Section 1 claim alleges that USSF “as part of a conspiracy with its membership,” adopted and applied the PLS to prevent NASL from competing with MLS as a Division I league and United Soccer League (“USL”) as a Division II league. Cmpl. ¶ 7. USSF’s application of the PLS allegedly ensure that MLS and USL each enjoy a monopoly in Division I and Division II, respectively, in violation of Section 2. Id. ¶ 6. The complaint defines the relevant product and geographic markets as (1) top-tier (i.e., Division I) and (2) second-tier (i.e., Division II) men’s professional soccer leagues in the U.S. and Canada. Id. ¶ 35. According to NASL, USSF and MLS, as commercial business partners, mutually benefit from MLS’s Division I monopoly. To help preserve its monopoly status, MLS allegedly entered into commercial arrangements with USL whereby USL agreed to serve as MLS’s “reserve league, with no possibility of USL ever challenging MLS’s dominance in the top tier.” Id. ¶ 3. Pursuant to this arrangement, USSF used the PSL to deny NASL Division II status for the 2018 season, making USL the sole Division II league. Id. ¶ 6. Notably, while the complaint names only USSF as a defendant, it nevertheless identifies MLS, USL, and Soccer United Marketing, LLC (“SUM”)—an entity allegedly controlled by MLS—as USSF’s alleged co-conspirators.
USSF’s Opposition to Plaintiffs’ Motion for a Preliminary Injunction
USSF’s opposition contended that NASL was in fact seeking a mandatory injunction, not a preliminary one, and therefore a more stringent standard applied. Def. Opp., N. Am. Soccer League, LLC v. U.S. Soccer Fed’n, No. 1:17-cv-5495, at 4 (E.D.N.Y. Oct. 16, 2017). Whereas a preliminary injunction seeks to maintain the status quo, a mandatory injunction alters it, making it a more extreme form of relief. USSF explained that the status quo was not, as NASL claimed, NASL’s status as a Division II league, but rather the declination of that status by the USSF for the 2018 season. Because NASL sought an affirmative change to this status quo, the mandatory injunction standard of a “clear showing” of entitlement to relief was appropriate, rather than the less stringent “likelihood of success” standard applicable to a preliminary injunction. Id. at 12–13. USSF further asserted that NASL’s allegations of concerted conduct fell short because they were premised only on the co-conspirators’ membership and participation in the USSF Board, which alone is insufficient. Id. at 15. USSF also outlined procompetitive effects of the PSL, such as promoting quality, enriching fan experience, and increasing public interest in professional soccer. Id. at 17–23. Finally, citing the Supreme Court case Texaco, Inc. v. Dagher, 547 U.S. 1, 7 (2006), USSF argued that the plaintiff “improperly target[ed] a core activity of USSF itself”: that of setting and applying the PLS. Def. Opp., N. Am. Soccer League, No. 1:17-cv-5495, at 18. USSF contended that the core standards enacted by a legitimate governing body, such as USSF, are lawful under Dagher, which established that where “the business practice being challenged involves the core activity of the joint venture itself,” the ancillary restraints doctrine, which governs “the validity of restrictions imposed by a legitimate business collaboration . . . on nonventure activities” does not apply. Id. The “core activity” at issue in Dagher was the pricing of a product produced and sold by the defendant joint venture. USSF did not elaborate on how the setting of the PLS was analogous to the pricing of a product, such that it too constituted a “core activity” of the venture, but simply stated that there was “no basis for the Court to second-guess the USSF’s core activities in organizing U.S. professional soccer.” Id. at 19.
The Court’s Denial of NASL’s Motion for a Preliminary Injunction
The district court denied the motion for a preliminary injunction on the grounds that NASL failed (i) “to demonstrate concerted action” required for a Section 1 claim and (ii) to meet the heightened standard of a mandatory injunction requiring a “‘clear showing’ of entitlement to relief based on the reasonableness of the restraint.” N. Am. Soccer League, LLC, 2017 WL 5125771, at *21. To establish concerted action, an antitrust plaintiff must provide direct or circumstantial evidence of “a conscious commitment to a common scheme designed to achieve an unlawful objective.” Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984). Judge Brodie rejected NASL’s claim that “the adoption and changes to the PLS are express agreements in and of themselves sufficient to satisfy concerted action prong of Section 1.” N. Am. Soccer League, LLC, 2017 WL 5125771, at *10. In doing so she cited the Second Circuit’s decision in AD/SAT, Div. of Skylight, Inc. v. Associated Press, 181 F.3d 216, 234 (2d Cir. 1999), in which the Associated Press (“AP”) was accused of violating Section 1 by conspiring to boycott plaintiffs’ business of electronically transmitting advertisements to newspapers. There, the Second Circuit declined to find concerted action based solely on “defendants’ status as members of the AP,” affirming that “every action by a trade association is not concerted action by the association’s members.” Id. To hold otherwise could result in “unwarranted regulation of legitimate conduct” and would undermine the principle that “an antitrust plaintiff must present evidence tending to show that association members, in their individual capacities, consciously committed themselves to a common scheme.” Id. In a lengthy footnote, Judge Brodie acknowledged that “there may be cases where a by-law, rule, regulation, or standard is so clearly anticompetitive on its face to warrant a finding of an ‘agreement’ for purposes of section 1.” Id. at *10 n.28. The court distinguished NASL’s allegations from the facts at issue in Associated Press v. United States, 326 U.S. 1 (1945) and NCAA v. Bd. of Regents, 468 U.S. 85 (1984), which involved agreements between organizational members that on their face were “designed to preclude all competition or competitors.” N. Am. Soccer League, No. 1:17-cv-5495, at *23 n.28. The court affirmed that, at minimum, to establish concerted action, NASL was required to provide evidence “that there was an agreement to agree to vote a particular way, compromising each individual Board member’s independence.” Id. at *10. Judge Brodie contrasted NASL’s showing from the evidence of concerted action in the Fourth Circuit case North Carolina State Board of Dental Examiners v. FTC, 717 F.3d 359, 365 (4th Cir. 2013). There, the defendant board, which regulated the practice of dentistry in North Carolina, “met prior to voting, agreed on what action to take, and then formalized that action through a vote”—thus the “Board members had made an agreement to agree prior to the formal vote.” N. Am. Soccer League, LLC, No. 1:17-cv-5495, at *23 n.28. The court went on to reason that even if NASL established concerted action, it failed to demonstrate an unreasonable restraint of trade under the rule of reason analysis, which involves a three-step burden shifting framework. Id. at *15. NASL satisfied the first step by establishing that USSF has sufficient market power to cause an adverse effect on competition. In making this finding the court upheld NASL’s proposed market definition, stating that given USSF’s “role as a standard-setting organization” it was logical to define the relevant markets along the same lines as USSF’s differentiation of Division I and Division II (i.e., top-tier and second-tier men’s professional soccer leagues located in the U.S. and Canada). Id. at *18. The court explained that under these circumstances, “industry recognition” may be especially relevant in defining the market as economic actors usually have accurate perceptions of economic realities. Id. at *17 (quoting Todd v. Exxon Corp. 275 F.3d 191, 205 (2d Cir. 2001)).
Because NASL satisfied the first step of the rule of reason analysis the burden shifted to USSF to offer evidence of the procompetitive effects of the alleged restraint—the PSL. USSF satisfied this burden by offering multiple justifications for the PSL, including that they promote quality, sustain fan interest, encourage investment by teams to discourage freeriding off of USSF and other organizations, and protect the financial viability of leagues. Id. at *18–19. The court stated that these justifications “provided plausible bases to conclude that the PLS have procompetitive effects.” Id. at *18. The burden then shifted back to NASL to prove that there are “less restrictive alternatives to the restraints at issue.” Id. at *19. Judge Brodie found that NASL failed to sustain this burden because it had “not expressly proposed any less restrictive alternatives other than the elimination of the parts of the PLS in dispute.” Id. at *20. Instead, NASL argued “that the standards are inherently anticompetitive, offering little to no procompetitive benefits, and that the free market itself is a better alternative.” Id. In all, the court concluded that while it was “satisfied that the pleadings . . . demonstrated a plausible claim for relief,” NASL nevertheless failed to make a “clear showing” of entitlement to relief, as required for the injunction it sought. Id. at *21.
This district court decision provides guidance on how courts are viewing the conduct of trade associations and joint ventures entities in Section 1 cases. It also demonstrates the stringent standard plaintiffs face when seeking to enjoin a defendant’s conduct, as courts are typically loathe to intervene and disrupt parties’ conduct pending the outcome of an antitrust case.