Will Kavanaugh's "Modern Approach" Change The Trajectory of Supreme Court Antitrust Jurisprudence?

Justice Kennedy swearing in Brett Kavanaugh to D.C. Circuit

In my last post, I discussed one of Judge Kavanaugh's antitrust opinions, in which he argued for a "modern approach" to antitrust law.  Others have similarly commented on Kavanaugh's willingness to modernize antitrust law by discarding outdated precedent and creating clear guidelines.  Professor Stephen Calkins notes that "modern" appears six times in Kavanaugh's dissent in Anthem and four times in Whole Foods.  In the latter case, Kavanaugh critiques older antitrust cases as "relics" with "loose" or "free-wheeling" analysis.  According to Kavanaugh modern approach, antitrust cases that have not "stood the test of time," should be pushed "to the jurisprudence sidelines."

Would this "modern approach" to antitrust law change the direction of the Supreme Court's jurisprudence?  It is hard to say.  After all, Justice Kennedy, whom Kavanaugh is nominated to replace, was himself a modernizer of antitrust law.  

Justice Kennedy authored the majority opinion in Brooke Group v. Brown & Williamson Tobacco, which heightened the standards for predatory pricing.  Kennedy held that a plaintiff must show that a defendant's price was below cost and that the defendant would be able to raise prices and "recoup" those loses after competitors left the market.  This modern standard is so hard to meet, that there have been virtually no successful predatory price cases after Kennedy's 1993 decision.

In Leegin Creative Leather Products v. PSKS, Justice Kennedy reversed 100-years of antitrust precedent in holding that resale price maintenance would no longer be considered per se illegal.  In so ruling, Justice Kennedy looked to modern "economic analysis," which showed that vertical retail price restraints could be procompetitive.  Rather than continuing to follow outdated precedent, Kennedy explained that the Sherman Act should be treated as a "common-law statute" which can "evolve[] to meet the dynamics of present economic conditions."  Kennedy was willing to overrule established precedent because "subsequent cases [and modern economic analysis] have undermined their doctrinal underpinnings."

Similarly, Kennedy joined the majority in Twombly in changing the pleading standards for antitrust cases.  That decision was based, in part, on the "costs of modern federal antitrust litigation and the increasing caseload of the federal courts."  Two years later, Kennedy himself was the author of the majority opinion in Iqbal which confirmed that Twombly's heightened pleading standards apply to all cases.   Together, Twombly and Iqbal represent the most significant change, or modernization, of civil procedure in decades.

Given Justice Kennedy's willingness to discard outdated precedent and modernize antitrust law based on our current understanding of economic principles, Judge Kavanaugh's "modern" approach to antitrust law will likely simply be an extension of Justice Kennedy's jurisprudence, rather than a new approach.  This is not altogether surprising considering that Judge Kavanaugh was a clerk for Justice Kennedy on the Supreme Court in 1993--the same year that Justice Kennedy created the modern standards for predatory pricing in Brooke Group.

Is the DOJ's Approval of AT&T's Acquisition of Time Warner Conditioned on the sale of CNN?

Cartoon tweeted by President Trump in August 2017

According to several news outlets, the Department of Justice has called on AT&T and Time Warner to sell DirectTV or Turner Broadcasting, which includes CNN, in order to gain approval of AT&T's $84.5 billion acquisition of Time Warner.

The New York Times reports that executives at AT&T and Time Warner are bewildered at the request because the proposed deal is a vertical merger.  When approving Comcast's similar acquisition of NBC Universal, under the Obama administration, the DOJ and FCC imposed several conditions on Comcast's business practices to prevent Comcast from withholding content from rivals.  The New York Times explains that these "behavioral remedies" are typical in vertical mergers, but "[t]he Justice Department's demands for divestitures would be a major change in antitrust policy..."

Reuters reports: "Trump, who has accused Time Warner's CNN and other media outlets of being unfair to him, criticized the deal on the deal on the campaign trial last year and vowed that as president his Justice Department would block it."

The Financial Times reports: "'Its all about CNN,' said one person with direct knowledge of the talks between the company and the DOJ, adding that the regulator made it clear to AT&T that if it sold CNN the deal would go through."

An unnamed source is quoted by Politico as saying: "The only reason you would divest CNN would be to kowtow to the president because he doesn't like the coverage.  It would send a chilling message to every news organization in the country."

In July, the New York Times reported that White House advisers had discussed using the deal as "a potential point of leverage over their adversary" CNN.  This reporting prompted Democratic Senators to warn against political intervention.  "Any political interference in antitrust enforcement is unacceptable" wrote Senator Amy Klobuchar to Attorney General Jeff Sessions, according to a CBS story.  Her Minnesota colleague Al Franken stated "The Trump Administration's war against the media must not influence the fate of the transaction."

On Sunday, Kellyanne Conway said that the Trump administration is not interfering with the Justice Department's review of the deal.

To make matters more complicated, today DOJ sources apparently told Fox News that it was AT&T who offered to divest CNN, but that the DOJ rejected this offer.  But according to CNN, the AT&T CEO denies this, stating: "Throughout this process, I have never offered to sell CNN and have no intention of doing so."

Apart from the "he said, she said" reporting, there are obvious political and First Amendment implications to this story, as well as antitrust concerns.  This will be the first major decision for Makan Delrahim, the newly appointed antitrust chief at DOJ.  Delrahim voiced tentative support for the deal prior to his nomination, but is said to be looking at it more closely now that he is in office.  Even before the news came out today, analysts said that the AT&T/TimeWarner deal "could be an early test of Delrahim's public perception as an independent official."

If Republicans Allow A Hearing on Merrick Garland's Nomination, They Should Ask Him About Teeth Whitening

Let me stipulate that trying to evaluate a Supreme Court nominee based on a 30-year old law review article is a bad idea.  That said, some of the issues that Obama nominee Merrick Garland wrote about in the mid-1980s are still relevant today.  These issues have surfaced, surprisingly enough, in cases involving occupational licensing and teeth whitening.

Before becoming a judge on the D.C. Circuit, Merrick Garland was an attorney at Arnold & Porter and a professor at Harvard Law School, where he taught antitrust law.  He wrote several articles for the Harvard Law Review and Yale Law Journal on the scope of judicial review for administrative regulations and the state action doctrine.  In the articles, Mr. Garland argued for a deferential, non-intrusive role for the judiciary.  Courts should review administrative regulations to ensure fidelity to the intent of Congress and should not preempt the policy decisions of states through antitrust law or by restricting the state action doctrine.

The state action doctrine immunizes state regulations from challenges under the Sherman Act.  In order to receive immunity, the challenged restraint must be "clearly articulated" as state policy and "actively supervised" by the state.  California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980).  At the time Garland wrote his article, some had argued that the state action doctrine should be narrowed to allow for the preemption of "economically inefficient" state regulations, especially when the regulations originated from the political efforts of private parties who stand to benefit from the restraint.

Garland, however, argued against such a revision, explaining:

The judiciary should not interfere under the aegis of the antitrust laws with a state's political decision, however misguided it may be, to substitute regulation for the operation of the market.  Despite protestations, the revisionist proposal is little more than a return to the era the Court left behind when it repudiated Lochner v. New York.  The substitution of 'antitrust' for 'due process' and 'economic efficiency' for 'liberty of contract' does not make the assault on democratic politics any more palatable.

Garland, Antitrust and State Action: Economic Efficiency and the Political Process, 96 Yale L.J. 486, 487-88 (1987).

Thirty years later, this same debate about economic liberty and the state action doctrine has resurfaced in the context of occupational licensing--specifically teeth whitening.

Like many professionals, dentists are licensed and regulated by state dental boards.  Those who are not licensed are prohibited by state law from practicing dentistry.  There is some dispute, however, about whether teeth whitening procedures -- i.e. shining an LED lamp into the mouth of a patient after application of a peroxide-based whitener -- can be performed by non-dentists.  Not surprisingly, dentists say no.

The North Carolina State Board of Dental Examiners, for example, issued cease-and desist letters to non-dentists offering teeth whitening services.  When the Federal Trade Commission brought a lawsuit against the Board claiming that it was improperly seeking to protect its members from competition, the Board argued it was immune under the state action doctrine because it was a government agency.

The case went all the way to the United States Supreme Court, which held in a 6-3 decision that the Board was not immune because it was not "actively supervised" by the state.  North Carolina State board of Dental Examiners v. Federal Trade Commission, __ U.S. __, 135 S.Ct. 1101 (2015).  In clarifying and narrowing the state action doctrine, the Court explained: "When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest."

In another case decided a few months later, teeth whiteners challenged a ruling by the Connecticut State Dental Commission that only a licensed dentist could shine the LED light into the mouths of customers during teeth whitening procedures.  Instead of an antitrust case, this was a constitutional challenge based on the Equal Protection and Due Process Clause.  The Second Circuit Court of Appeals rejected the challenge, however, finding that there was a rational basis to uphold the regulation because, however tenuous, there was at least some evidence that LED lights may cause some harm to some consumers.  Sensational Smiles, LLC v. Jewel Mullen, 793 F.3d 281 (2015).  

After noting that this was not an antitrust case, the Second Circuit explained that even if the true purpose of the regulations was naked economic protectionism, that still would be constitutional.  

Much of what states do is to favor certain groups over others on economic grounds.  We call this politics.  Whether the results are wise or terrible is not for us to say, as favoritism of this sort is certainly rational in the constitutional sense...

To hold otherwise would be to interpret the Fourteenth Amendment in a way that is destructive to federalism and to the power of the sovereign states to regulate their internal economic affairs. As Justice Holmes wrote over a century ago, “[t]he 14th Amendment does not enact Mr. Herbert Spencer's Social Statics.” Lochner v. New York, 198 U.S. 45, 75, 25 S.Ct. 539, 49 L.Ed. 937 (1905) (Holmes, J., dissenting)

The Second Circuit's Sensational Smiles decision has been criticized, particularly from the right.  A few weeks ago, George Will devoted an entire column attacking the teeth whitening cartel and arguing for more aggressive judicial review of economic regulations.  If the Supreme Court refused to take the appeal, Will argued, government would have "an unlimited licence ... to impede access to professions, reward rent seekers and punish consumers, thereby validating Americans' deepening disdain for government."

While the Supreme Court recently declined the cert petition in Sensational Smiles, this issue is likely to come before the Court in the next few years because there is a clear Circuit split between the Second and Tenth Circuit on one side and the Fifth, Ninth and Sixth Circuits on the other side, who reject economic protectionism as a rational basis for regulation under the Fourteenth Amendment.

While I do not presume to know how Judge Garland would answer these questions today, it is noteworthy that he previously argued that courts should defer to state policy decisions even if the decision was economically inefficient and the product of political pressure from market participants.  Both the Second Circuit's opinion and Garland's law review article argue that scrutinizing these types of economic regulations would lead to a return of the discredited "Lochner era," where a conservative Supreme Court invalidated New Deal legislation based on notions of economic liberty.

This would be an ideal avenue of questioning for Judge Garland as a Supreme Court nominee:

• "Do you agree that naked economic protectionism is a legitimate basis for government action?" 
• "Have your views on the state action doctrine changed since you wrote that law review article?"
• "What role does economic theory have in the judicial review of state or federal regulations?"
• "Do you think the current Supreme Court is in danger of returning to the Lochner era?" 
• "Where do you get your teeth whitened?" 

But since the Republicans do not appear willing to hold a hearing, all that we can do is read a 30 year-old law review article and speculate as to how Judge Garland would answer these questions.

FTC Issues Guidance on Scope of "Unfair Competition" Under Section 5 of FTC Act

In a short statement issued yesterday, the FTC issued guidance regarding how it will interpret Section 5 of the FTC Act. Section 5 is a little-used antitrust statute for which the FTC has issued no guidance in the Act’s 100-year history. It states that “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce” are unlawful. When drafting the statute, however, Congress did not define specific acts or practices which would constitute unfair competition, leaving considerable uncertainty in the interpretation of the law. 

While most of the Commission’s enforcement actions have been brought pursuant to the Sherman or Clayton Acts, Section 5 prohibits acts and practices which fall outside the scope of those statutes. In other words, Section 5 is broader than the Sherman and Clayton Acts, but the boundaries of “unfair competition” under the FTC Act have never been clearly defined.

The FTC’s new one-page policy statement describes three principals to which the Commission will adhere when enforcing Section 5 on a “standalone” basis. First, the guidance calls on the FTC to promote “consumer welfare,” which is the “public policy underlying the antitrust laws.” Second, the statement provides that any act or practice challenged under Section 5 will be evaluated under a framework “similar to the rule of reason,” meaning that the practice must “cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.” Finally, the guidance notes that the FTC will be less likely to challenge an act or practice under Section 5 if such practice can be addressed through enforcement under the Sherman Act or Clayton Act. 

The agency has suggested that these short principals will allow it to keep a flexible approach to enforcement of the statute, but some critics argue that the guidance is vague and does not go far enough to address the ambiguities in the law, leaving businesses unsure of what could trigger an investigation. Prior to the announcement of these guidelines, the FTC has used the vague standards of Section 5 to negotiate settlements in several high profile and controversial cases.

The FTC has emphasized that this new guidance does not signal new or increased enforcement priorities. For example, Commissioner Joshua Wright recently stated that the new guidelines would not lead to an “explosion of litigation.” However, Wright’s fellow Republican-appointed Commissioner, Maureen Ohlhausen, dissented from the FTC’s guidelines because of her fears that the FTC’s “unbounded interpretation” of Section 5 “is almost certain to encourage more frequent exploration of this authority,” thus leading to more investigations and enforcement activity.

Given the lack of appellate case law interpreting the scope of Section 5, the FTC’s new guidance will, at the very least, provide a framework for predicting what behavior may constitute “unfair competition.” Going forward, companies will know that the FTC’s analysis of Section 5 will proceed along economic analysis similar to the rule of reason. As Commissioner Wright explained:

“The promotion of consumer welfare is a cornerstone of the FTC’s antitrust enforcement, and these principles reaffirm the agency’s legal framework in carrying out that important mission,” said FTC Chairwoman Edith Ramirez. “The statement formally aligns Section 5 with the Sherman and Clayton Acts.”

“The rule of reason has ambiguity too. Complaints about ambiguity in the rule of reason are really complaints about the antitrust laws generally. The fundamental point is that we now with this statement have a way to resolve those types of disputes grounded in modern antitrust instead of based upon the whims of whatever three commissioners happen to believe that day.”

In addition to providing clarity under federal law, it will be interesting to see whether the FTC’s guidelines will be used by state courts when interpreting the scope of “unfair competition” under state law. Most states have their own “little FTC Act,” which in some cases can be enforced by private parties in civil lawsuits. Some states have existing case law defining the scope of “unfair competition” under state law, which may be impacted by the FTC’s new guidance.

March (Appellate) Madness

It has been a few months since we updated on the O’Bannon antitrust case, where federal judge Claudia Wilken ruled last summer that the NCAA’s amateurism rules violated federal antitrust laws.  (You can read our previous articles here, here, here, and here.)  But this week, as the rest of the country filled out their brackets and geared up for the start of the NCAA tournament, the NCAA was getting ready for another battle – in the Ninth Circuit.  On Tuesday, the appeals court heard oral argument from both the NCAA and plaintiffs’ counsel, as the parties debated the lower court’s decision, which allowed limited compensation for the use of athletes’ name, image, and likenesses.  

Central to the parties’ argument was the interpretation of NCAA v. Board of Regents of the University of Oklahoma, a 1984 case regarding football television rights.  While the NCAA lost that case, one statement in that case has become central to the NCAA’s current “amateurism” defense:  “To preserve the character and quality of the ‘product,’ athletes must not be paid.”  In Tuesday's arguments, some of the judges seemed skeptical of the NCAA’s shifting definition of “pay,” they were also concerned about opening the door to “pay for play.”  (The full arguments can be watched here.)

We can expect a ruling in the upcoming months, though this is unlikely to be the final appeal in the case. 

Supreme Court Rules NC Dentist Board Not Immune From Antitrust Scrutiny

Earlier this morning, in a 6-3 decision, the Supreme Court ruled that state professional boards comprised of active market participants are not immune from antitrust laws even though the boards are formally designated as a state agency, unless the state also provides active supervision of the boards' actions.

The case arose out of an FTC action against the North Carolina State Board of Dental Examiners ("Board") for issuing cease-and-desist letters to non-dentists offering teeth whitening services.  The Board claimed that the non-dentists were engaged in the unlicensed practice of dentistry.  The FTC, however, claimed that the Board was seeking to protect its members (licensed dentists who performed teeth whitening services) from competition from non-dentists charging lower prices.

The issue on appeal to the Supreme Court was whether the Board enjoyed state action immunity under Parker v. Brown, 317 U.S. 341 (1943), given that the Board was created by and designated as a "agency of the State" under North Carolina law.

The Court explained that "while the Sherman Act confers immunity on the State's own anticompetitive policies out of respect for federalism, it does not always confer immunity where, as here, the State delegates control over a market to a nonsovereign actor."  Although the Board was designated as a state agency under North Carolin law, "[s]tate agencies are not simply by their governmental character sovereign actors for purposes of state action immunity...  Immunity for state agencies, therefore, requires more than a mere facade of state involvement..." 

In this case, the Court was concerned that the Board was controlled by active market participants with a financial interest in the regulation at issue.  (Indeed, the Court noted that 8 out of the 10 Board members earned substantial fees from teeth whitening services.)

The Court explained:

Limits on state-action immunity are most essential when the State seeks to delegate its regulatory power to active market participants, for established ethical standards may blend with private anticompetitive motives in a way difficult even for market participants to discern...  In consequence, active market participants cannot be allowed to regulate their own markets free from antitrust accountability.

Thus, the Court held that state agencies that are controlled by active market participants must meet the two-pronged test set forth in California Retail Liquor Dealers Ass'n v. Midcal Aluminum Inc., 445 U.S. 97 (1980), to be afforded state action immunity.  That test had been created by the Supreme Court to determine whether a private trade association (wine merchants who were delegated price fixing authority under California law) was entitled to state action immunity.  The Midcal test requires that the State (1) articulate a clear policy to allow anticompetitive conduct and (2) provide "active supervision" of the anticompetitive conduct.

Today, the Court held that this "active supervision test is an essential prerequisite of Parker immunity for any nonsovereign entity -- public or private -- controlled by active market participants."  The Court stated:

State agencies controlled by active market participants, who possess singularly strong private interests, pose the very risk of self-dealing Midcal's supervision requirement was created to address...  This conclusion does not question the good faith of state officers but rather is an assessment of the structural risk of market participants' confusing their own interests with the State's policy goals.

In other words, the Court recognized that "specialized boards dominated by active market participants" are "more similar to private trade associations vested by States with regulatory authority," than to the more typical state agencies previously afforded state action immunity.  "When a State empowers a group of active market participants to decide who can participate in its market, and on what terms, the need for supervision is manifest."

Since the Board did not contend that its conduct was actively supervised by the State of North Carolina, the Board was therefore not entitled to Parker immunity.

The dissenting opinion (authored by Justice Alito and joined by Justices Scalia and Thomas) argued that the majority's ruling was an "unprecedented step" that would "create practical problems and have far reaching effects on the States' regulation of professions."  The dissent pointed out that state medical and dental boards are typically staffed by practitioners, and that there is nothing new about the suspicion that such boards were acting out of the interests of their members and not the public.  "As a result of today's decision, States may find it necessary to change the composition of medical, dental and other boards, but it is not clear what sort of changes are needed to satisfy the test that the Court now adopts." 

Among the questions raised by the dissent were:

• What does it mean that a state agency is controlled by active market participants?  
• What is a controlling number?  
• Can something less than a majority suffice? 
• Who is an active market participant?  
• What is the scope of the market being analyzed?  
• Must the market be relevant to the particular regulation being challenged?  
• How much participation makes a person active?

The answers to these questions may eventually be worked out by lower courts or the FTC.  It will be interesting to see whether and how States change the makeup of professional boards or adopt new procedures to ensure that the actions of such boards are "actively supervised" by a non-market participant. 

In the meantime, I expect there will be an increase in the number of cases challenging alleged protectionist activity by state professional boards.

The Supreme Court's decision is available here:

North Carolina State Board of Dental Examiners v. Federal Trade Commission

Womble Carlyle Antitrust Lawyers Named to 2015 North Carolina Legal Elite

Business North Carolina magazine has named 14 Womble Carlyle attorneys to the 2015 North Carolina Legal Elite—the magazine’s annual listing of the state's top lawyers.
In addition, Press Millen was this year’s top vote-getter in North Carolina in the Antitrust category and as such, was profiled in Business North Carolina magazine.

The 2015 Legal Elite honorees are:

Charlotte
Cy Johnson, Business
Kurt Lindquist, Litigation
Bill Matthews, Real Estate
Tom Waldrep, Bankruptcy

Greensboro
Jack Hicks, Intellectual Property

Raleigh
Liz Arias, Tax/Estate Planning
Liz Riley, Construction
Nellie Shipley, Raleigh

Winston-Salem
Andy Copenhaver, Antitrust
Jim Phillips, Antitrust
John Pueschel, Employment Law
George Ragland, Tax/Estate Planning
Kim Stogner, Tax/Estate Planning

In addition, the following Womble Carlyle attorneys are members of the North Carolina Legal Elite Hall of Fame, meaning they received the most votes in the state in their particular practice area. Hall of Fame members are no longer eligible for the annual rankings. They are:
Alfred Adams, Real Estate (Winston-Salem)
Jim Cooney, Criminal Law (Charlotte)
Mark Horoschak, Antitrust (Charlotte)
Betty Quick, Tax/Trusts & Estates (Winston-Salem)

Millen will move into the North Carolina Legal Elite Hall of Fame category next year.
Statewide, 641 lawyers — less than 3% of the total — were picked by their peers in 14 mostly business-related categories. Notices were sent to more than 22,000 active members of the North Carolina State Bar. Voters could not pick themselves, and they could select partners and associates only if they also selected lawyers outside the firm in the same categories.

2014 Elections May Lead To Changes In Antitrust Merger Review

With the Republicans gaining control of the Senate in yesterday's elections, there is a greater chance that Congress may enact reforms to the merger approval process.  Currently, there is a bill pending in the House that would unify merger preliminary injunction standards at the Department of Justice and Federal Trade Commission.  The bill, known as the Standard Merger and Acquisitions Review Through Equal Rules Act ("SMARTER"), has passed out of committee in the House.  It is widely believed that the bill is more likely to pass the Senate under Republican control. 

Currently, DOJ and FTC have separate standards for blocking a merger.  The DOJ must show irreparable harm in order to obtain a preliminary injunction, but the FTC only has to show that blocking the deal with be in the public interest.  The bill would require both agencies to meet the traditional irreparable harm standard.  An interesting Law360 article was published about the SMARTER bill and other antitrust and consumer protection reforms that may result from the 2014 elections and Republican control of the Senate.

O’Bannon Decision Could Open the Door to Significant Changes in Collegiate Athletics

Since Judge Claudia Wilken’s recent ruling in O’Bannon et al. v. NCAA et al., Case No. 4:09-cv-03329 (N.D.Ca.), in which the judge called the NCAA a “cartel” that restrains the college athletics market, many commentators have forecasted the end of the NCAA.  But, despite the broad language of the opinion, the impact of the injunction awarded against the NCAA may be rather limited.  As written, the injunction can be seen as a small victory for the NCAA, temporarily holding off the full impact of the decision and allowing the NCAA to reexamine its policies before any further erosion of the considerable power it has amassed by marketing and promoting the college athletes that now form the class of plaintiffs in the action. As detailed below, the full economic and legal impact may not be ascertained for years, when the Court’s ruling — if it stands — will have been implemented at major college athletic scholarship programs. 

In this class action suit, a group of current and former college men’s basketball and football players, led by former UCLA basketball player Ed O’Bannon, sued the NCAA, alleging that the NCAA’s rules barring athletes from receiving a share of the revenues that the NCAA earns from licensing athletes’ names, images, and likenesses violates the Sherman Antitrust Act.  The players originally sought both a permanent injunction, enjoining the NCAA from enforcing the player compensation ban, and damages; however, in May (less than a month before trial), the players decided to forego their damage claims and pursue only the injunction.  Besides removing the individual damages claims, which many thought were weaker and which would have been decided by a jury, the plaintiffs’ decision to pursue only injunctive relief also ensured that the claims would only be heard by the judge, who had seemed skeptical of the NCAA’s defenses from the outset.

The case went to trial over three weeks in June, where numerous experts, athletes, and school administrators testified regarding the anti-competitive harm alleged by the players and the NCAA’s justifications for maintaining “amateurism” in college sports.  In a key moment for the players, the NCAA’s own preeminent antitrust expert agreed that he had called the NCAA a “cartel” in a prior publication. This concession and the Court’s subsequent finding on the cartel issue left the NCAA with defenses that seemed deflated in Judge Wilken’s ruling.  

On August 8, the Court issued a 99-page ruling in the case, finding that the “challenged NCAA rules unreasonably restrain trade in the market for certain educational and athletic opportunities offered by NCAA Division 1 schools” and ruling in favor of the plaintiffs.  First, the Court found that the players had properly alleged two relevant national markets, the “college education market” and the “group licensing market,” impacted by the NCAA’s athlete compensation ban.  The Court then found that the NCAA’s rules restrained trade in these markets, acting as both a “sellers’ cartel” and, alternatively, a “buyers’ cartel.”¹  The Court also rejected each of the NCAA’s pro-competitive justifications for its rules. The NCAA had argued that the compensation ban was procompetitive because it (1) preserved amateurism in college sports, (2) promoted competitive balance among teams, (3) helped integrate academics and athletics,² and (4) generated greater output by increasing opportunities for schools and student-athletes to participate in Division 1 sports. The Court analyzed and rejected each of these justifications in striking terms, finding that the NCAA’s overly restrictive compensation ban played a limited role in driving consumer demand for Division 1 football and basketball. Instead, the Court agreed with the plaintiffs’ argument that the NCAA could adopt less restrictive rules that limited the anticompetitive effects while allowing the NCAA to pursue its stated objectives. Specifically, Judge Wilken found that that the plaintiffs showed “that the NCAA could permit FBS football and Division 1 basketball schools to use the licensing revenue . . . to fund stipends covering the cost of attendance” and could “permit schools to hold limited and equal shares of that licensing revenue in trust for the student-athletes” (emphasis added). The word “limited” is important: while the Court held that a complete ban on compensation to football and basketball players was anticompetitive, it recognized that the NCAA still could impose significant limitations on such compensation, essentially setting a floor of $5,000 per year.

After completing its analysis, the Court issued a separate permanent injunction, which by its terms only applies to men’s basketball and football players enrolled after July 1, 2016.  It enjoins the NCAA from prohibiting “deferred compensation in an amount of $5,000 per year or less” for the licensing of athletes’ names, images, and likenesses through a trust fund payable upon expiration of athletic eligibility or graduation.”  The injunction also prevents the NCAA from prohibiting the inclusion of compensation up to the full cost of attending college.  (The NCAA’s rules had previously capped scholarship awards to an amount below the full cost of attendance.)  In response to a motion for clarification filed by the NCAA, the Court clarified that the injunction would apply to “prospective and current student-athletes for the 2016-2017 season and beyond.” The NCAA recently filed its notice that it planned to appeal the decision to the Ninth Circuit.

The broad and lengthy findings in the Court’s opinion are interesting when compared with the limited and somewhat arbitrary relief awarded in the injunction.  While the NCAA is appealing the ruling, the injunction could arguably be seen as a win for the NCAA, creating a minimal “salary cap,” rather than opening up the market for six-figure student athlete salaries.  Yet, that minor victory may be temporary, as the opinion raises a world of new questions as the NCAA and its member schools begin to imagine a drastically different college sports environment.

First, it’s possible that the O’Bannon injunction, as it is currently written, will actually apply to few student athletes.  The injunction itself only applies to men’s basketball and football players playing in the 2016-2017 season or later, most of whom were not eligible members of the class of plaintiffs. Future players, currently in high school and likely uncertain of their future in college athletics, cannot conceivably be bound by the Court’s ruling.  If a star quarterback entering college in 2016 wanted to sue the NCAA to receive more than the currently allowed $5,000 yearly trust fund payment or to prevent the money from being placed in a trust at all, he could do so.

Despite the potentially limited injunction, the Court’s sweeping holding — if it survives the NCAA’s appeal — could have broad implications for college sports in the future, beyond those contemplated in the opinion.  The Court’s finding that it operates as a “cartel” could haunt the NCAA in subsequent actions, even if the current suit has little practical import.   If baseball or women’s basketball gain in popularity and begin generating revenues for the NCAA or its member schools, the NCAA would have difficulty arguing that O’Bannon opinion did not contemplate compensation to those players as well, despite a technically, narrow class in the O’Bannon case.  In addition, while O’Bannon class members chose not to pursue their damages claims, it is possible that non-class-member basketball and football players could seek individual damages based on the NCAA’s decades-long practice of licensing players’ name, image, and likeness.  The “limited” restraint allowed by the injunction — such as the somewhat arbitrary $5,000 cap on compensation, the fact that players on the same team must be compensated equally, and the fact that all compensation must be held in a trust until graduation — could also be challenged in future lawsuits.  These limitations, minimally justified in the opinion (if discussed at all), are arguably inconsistent with the Court’s sweeping findings and may be the next to fall.

In many ways, the NCAA is a victim of its own success in turning college athletics into a big business. Many people object to college athletics being viewed as a business, but given the NCAA’s tremendous success in marketing itself, its member schools, and their football and basketball teams, it is hard to argue that college athletics is not a business — in fact, a very big business. Antitrust law is specifically designed to ensure competition and therefore, plaintiffs bring cases, they say, to regulate big business, break up cartels, and ensure a competitive free market economy. Antitrust law, with its focus on economic theory, is not particularly well designed to protect amateurism, cherished traditions, or academic integrity. In this case, the NCAA was forced to defend its compensation ban in terms of procompetitive business justifications, but the real justification for the compensation ban is not rooted in economic theory but in a self-protective view of amateurism in college athletics. There may be very good policy reasons why college athletics should not be governed by the same competitive free market principles that govern other businesses but, absent some action by Congress, the NCAA, ironically, must play by the rules (of antitrust law). The limitations in Judge Wilkin’s injunction — allowing the NCAA to impose a $5,000 salary cap, deferred compensation, and equal pay to athletes — have been criticized as arbitrary. Indeed, these rules are the type of line-drawing and policy decisions that are usually made by legislators — not judges. Despite the NCAA’s loss, those limitations likely will mean that college athletics will not change very much as a result of the injunction issued in this case. The question remains, however, whether this case has opened the door to broader challenges and more pervasive changes to college athletics in the future.

[1] The Court’s finding that the NCAA’s practices amounted to a monopsony, or an agreement to fix prices among buyers rather than sellers, is significant, as the outcome of the case may have been predetermined on this finding.

[2] As an editorial matter, one could quarrel with the Court’s adoption of testimony and the position that the commitment required of scholarship athletes impeded academic achievement. Many students achieve academically while balancing school with other work and family obligations, some of which exceed the athlete’s commitment.

NOTE:  This article was authored by Womble Carlyle attorneys David Hamilton, Jason Hicks, and Amanda Norris Ames and first appeared in the Sports Litigation Alert and Legal Issues in College Athletics.  

Antitrust Laws Are Rapidly Changing In Latin America

In recent travels to Central America, it’s been interesting to see the number of American companies operating and distributing in the region.  So in a recent telephone conference with other antitrust practitioners, I was intrigued when competition law in Latin America was discussed.  I learned that, as with our firm, as the economy becomes more global and more US companies distribute abroad, antitrust attorneys are receiving more and more questions about antitrust issues in the Americas.

While antitrust laws in many Latin American countries have similar elements to those in the US, unlike US antitrust laws, passed over a century ago, most countries’ laws are new and rapidly changing and evolving.  This leads to less clarity in the meaning of the law and less predictability as to enforcement.  Because of the newness of the laws and the frequency of change in the law, there are few judicial decisions in many jurisdictions to help define the scope of the antitrust laws.  Moreover, most Latin American countries are civil law, rather than common law, jurisdictions.  Generally, this means that, rather than looking to the body of caselaw which has interpreted a statute over the years as we do in the US under the common law tradition, these countries using civil law focus on the text of the statute and the application of the facts at hand to the statute.  

As the body of antitrust law develops in many Latin American countries, enforcement mechanisms are also developing.  Many have created new agencies to investigate and prosecute antitrust violations and the powers of those agencies have been expanded to conduct raids and cooperate with other jurisdictions.  Some jurisdictions, such as Chile and Peru, have begun to adopt new leniency programs for those cooperating with investigations, and others have begun allowing those harmed by anticompetitive conduct to bring civil suits.  

As Latin American countries work to develop and strengthen their antitrust laws, it will be interesting to continue tracking developments in the region.  

Court Rules NCAA Violated Antitrust Laws: But Did The NCAA Win By Losing?

A federal court has ruled that the NCAA cannot ban schools from giving athletes money based on their name, image and likeness, and cannot impose a salary cap below $5,000.  See O'Bannon v. NCAA (N.D. Calif Aug. 8, 2014).  The newspaper headlines will call this a defeat for the NCAA, but there may be a silver lining.  This interesting SBNation article argues that the biggest winner in the ruling is the NCAA itself since it was likely going to allow schools to offer a stipend anyway, and rather than opening up the market, this ruling appears to allow the NCAA to set limits on such compensation.  We followed this case in previous posts, and will likely discuss it in more detail later.  There is a lot to go through in the Court's 99 page opinion.

EDVA Dismisses "Standards Conspiracy" Suit

Companies and trade associations involved in setting industry standards should take note of a recent decision out of the Eastern District of Virginia this month. 

In SD3, LLC v. Black & Decker, Inc. et al, a federal judge dismissed an antitrust suit alleging a conspiracy in the power tool industry to prevent adoption of table saw safety technology.  The suit, brought by SD3, maker of the SawStop technology which prevents table saw injuries, after unsuccessful licensing negotiations with the defendant power tool companies, alleged a “group boycott” on the part of the companies, claiming that the tool companies conspired not to license the company’s technology.  SD3 also claimed that the companies attempted to prevent the technology from becoming an industry standard.  

The tool companies filed motions to dismiss, and the judge recently dismissed the suit, finding that SD3 had not alleged sufficient proof of a group boycott or any harm to competition.  First, the judge noted that many of the tool companies had continued to negotiate with SD3 after the alleged boycott began.  In addition, the court found the “standards conspiracy” allegations insufficient, noting that “neither mere participation in a standards-setting body nor mere membership in a trade association is sufficient to state an antitrust conspiracy claim” and that merely declining to impose the technology on the market “did not exclude ‘SawStop’ technology from the market in any way.” 

The court’s dismissal is relevant for companies and associations considering industry or product safety standards. 

Disclaimer: Womble Carlyle represented a defendant in this case.

Suit Challenging Cable Bundling Survives Motion to Dismiss

Cable subscribers, tired of being forced to purchase more obscure channels like VH1 Classic and Teen Nick in order to get their nightly Daily Show fix on Comedy Central, should be encouraged by a recent antitrust decision out of the Southern District of New York.

In the case of Cablevision Systems Corporation v. Viacom International, Inc., cable operator Cablevision sued cable programmer Viacom based on Viacom’s practice (like virtually all large cable programmers) of pricing its channels so that the all of its offerings must be taken in order to purchase popular channels at a lower price.  Cablevision alleges that Viacom abuses its market power over access to its most popular cable networks (including BET, Comedy Central, MTV, and Nickelodeon) to force cable operators to license and distribute its less popular channels, which many subscribers do not want (like CMT Pure Country, Logo, MTV Hits, MTV Jams, Nick Jr., Nick 2, Nicktoons, Teen Nick, VH1 Classic, and VH1 Soul).  Cablevision argues that Viacom’s practices inflict on-going harm to Cablevision, consumers, and competition generally and constitute illegal “tying” and “block booking” in violation of Section 1 of the Sherman Act and New York state antitrust laws.

Viacom filed a motion to dismiss the complaint, alleging that Cablevision had not sufficiently alleged harm to competition (a critical element of a Sherman Act claim) and waited too long to bring its complaint.  This week the judge denied Viacom’s motion to dismiss, allowing the case to proceed to discovery on all counts.  While Cablevision will still face a difficult road as it is forced to prove its claims, the opinion constitutes a significant victory for cable operators and consumers seeking an alternative to current cable bundling practices. 

Cablevision is not the first to make this type of antitrust claim, but it is significant because it is the first to survive a motion to dismiss.  A prior suit out of the Ninth Circuit, Brantleyv. NBC Universal, Inc., which was brought as a class action by consumers seeking to unbundle cable, was dismissed before reaching the merits.  The Court found that anticompetitive harm not been alleged, because plaintiffs were merely alleging harm to consumers, rather than competition.  Cablevision’s lawyers have gone to great lengths in their filings to differentiate themselves from the consumer plaintiffs in the Brantley case and have beefed up their complaint with nearly 70 pages of in-depth economic analysis and market data in support of their allegations of abuse of market power and harm to competition.  (Ironically, however, Cablevision was a defendant in the Brantley case and took many positions contrary to those in its current complaint in its pleadings in that case—a fact not lost on Viacom in its motion to dismiss.)

Cablevision’s suit is also interesting, because it constitutes the first time a cable operator has sued a cable programmer, alleging that cable bundling practices are the result of programmer demands, and not a practice agreed upon between operators and programmers, as was alleged in Brantley.  By claiming the practices—much loathed by many cable subscribers—are solely the result of programmers’ demands, Cablevision’s antitrust suit seeks to put an end to these practices and, presumably, open up more possibilities for alternative cable pricing arrangements. 

More Discussion of Antitrust and Sports Leagues

My colleague Amanda Ames has written an interesting article about the O'Bannon v. NCAA case, which is all over the news these days.  Additionally, Law360 published an article that I wrote about LCA v. Virginia High School League.  This is the antitrust case in the Western District of Virginia, previously discussed on this blog, in which a private school is seeking to force its admission into a public school sports league.  A description of my article is available here, and you can read the whole thing with a Law360 subscription here.

Do Public School Athletic Leagues Have To Admit Private High Schools?

Liberty Christian Academy (LCA), a private high school in Lynchburg, Virginia, has filed an antitrust action against the Virginia High School League (VHSL), a non-profit organization of public high schools in Virginia.  The lawsuit was filed June 2, 2014 in the Charlottesville Division of the Western District of Virginia.

The VHSL organizes public schools into districts and regions for purposes of conducting athletic competitions and statewide playoffs.  LCA filed its lawsuit because, as a private school, LCA is barred from membership in the VHSL and claims to be unable, with limited exceptions, to schedule athletic games with the nearby public schools.  LCA complains that it has to travel far distances to play games against inferior opponents.  LCA argues that the VHSL's rules are akin to a group boycott and constitute an unreasonable restraint of trade in violation of federal and state antitrust laws.  The relevant markets alleged in the Complaint are the markets for commercial exhibition of high school football contests and basketball contests in Virginia. 

Although some states allow private high schools to join their public high school athletic leagues, other states have separate private and public leagues, such as Virginia, Maryland and Texas.  In the lawsuit, LCA argues that the prohibition on non-public high school membership in the VHSL has no pro-competitive purpose and cannot be justified on any claimed basis that it is necessary to promote fair on-field competition.  I suspect that the ability of private schools to recruit and give scholarships to football and basketball players from a wide geographic area (unlike public schools who have to find players within their own geographic district) would be one of the reasons for the VHSL's rule.

The Complaint's reference to the "integration of public and private schools into one athletic association" appears to suggest a strained analogy to civil rights and the racial integration of public schools in Virginia.  LCA should be very careful in suggesting any such analogy, given that LCA was specifically founded in 1967 as a segregation academy in response to the integration of public schools in Virginia.  There is no small amount of irony in LCA's complaint that it is being excluded and segregated from public school athletic competition.

Several public high school athletic programs are described in the Complaint.  These schools are very familiar to my ears: T.C. Williams in Alexandria, famous from the movie Remember the Titans; football powerhouse Oscar Smith High School in Chesapeake; and Brookville High School outside Lynchburg, my fathers' almar mater and the arch rival of my high school, Jefferson Forest.

More about the lawsuit can be found here and here.

Out of Trial

I just finished a very interesting, week-long trial in Albemarle County regarding stormwater management and streams within a new shopping center.  It was fascinating to learn about how much engineering and construction goes into dealing with water issues -- most of which is all underground!  Now that I am out of trial, I hope to be able to post about some of the interesting antitrust cases and developments of the past month.

Supreme Court Creates New Standing Test For Asserting False Action Claim Under Lanham Act

On March 25, 2014, the Supreme Court issued a unanimous opinion, authored by Justice Scalia, in Lexmark International, Inc. v. Static Control Components, Inc.  In a previous post, I discussed my involvement in this case at the trial court level.

Supreme Court Justice Scalia

The case involves the standing requirements for asserting a claim for false advertising under the Lanham Act.  There was an existing split among the regional circuits, with some courts limiting standing to direct competitors, other courts adopting the standing analysis from antitrust cases, and other courts applying a broader "reasonable interest" test.  The Supreme Court, however, rejected all of these standards and created a new "zone of interests" test, explaining:

While none of those tests is wholly without merit, we decline to adopt any of them. We hold instead that a direct application of the zone-of-interests test and the proximate-cause requirement supplies the relevant limits on who may sue.

The "zone of interests" test originates from cases interpreting standing to seek judicial review under the Administrate Procedures Act.  The Court, however, held that this test also applies to other statutorily created causes of action, like the Lanham Act.  The Court further stated:

We thus hold that to come within the zone of interests in a suit for false advertising under §1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales. A consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question....  Even a business misled by a supplier into purchasing an inferior product is, like consumers generally,not under the Act’s aegis.

With respect to the proximate cause analysis, the Court held:

that a plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff.

The Court's new "zone of interests" test appears to be broader than some of the tests used by lower courts but more narrow that others.

In reaching its decision, the Supreme Court critiqued the various multifaceted tests that lower courts previously had used, noting that these "open-ended balancing tests can yield unpredictable and at times arbitrary results."  It will be interesting to watch if this decision leads to broader changes in the standing requirements for other statutory causes of action.

For example, the traditional standing test for antitrust claims was one of the "open-ended balancing tests" that the Court critiqued.  Does this case forecast a change to standing principles under antitrust law?

Supreme Court to Decide Requirements for Standing under Lanham Act

In the coming weeks, the Supreme Court will decide a case involving the proper framework for determining standing to maintain an action for false advertising under the Lanham Act.  The case, Lexmark International, Inc. v. Static Control Components, has a long history, in which I played a role nearly eight years ago.  In fact, I believe that I drafted the motion to dismiss that is the subject of this appeal.

The District Court granted that motion, in September 2006, dismissing the antitrust and false advertising counterclaims for lack of standing based on the factors set forth in Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters.  After that decision, in 2007, there was a trial on the remaining claims, which resulted in a number of lengthy appeals.  In one of those appeals, on October 26, 2012, the Sixth Circuit reversed the District Court's ruling as to standing after finding that that the Associated General factors were not the proper analysis for a Lanham Act claim.

This decision added to an existing circuit split on the proper analytical framework.  The Third, Fifth, Eighth and Eleventh Circuits have adopted the Associated General factors; the Seventh, Ninth and Tenth Circuits have adopted a categorical test permitting suits only by an actual competitor; and the Sixth and Second Circuits have applied a more expansive "reasonable interest" test.

It is rather unusual for the Supreme Court to review a district court decision from way back in 2006.  I imagine that at the time the district court initially ruled on this issue, many of the cases that are now being cited and relied upon by both parties had not yet been decided.  It is also odd, on a personal level, to remember back eight years ago (before I had any children!) when I drafted that initial motion to dismiss.