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CHICAGO PROFESSIONAL SPORTS L.P. v. NBA

January 24, 1991

CHICAGO PROFESSIONAL SPORTS LIMITED PARTNERSHIP and WGN CONTINENTAL BROADCASTING COMPANY, Plaintiffs,
v.
NATIONAL BASKETBALL ASSOCIATION, Defendants


Hubert L. Will, United States District Judge.


The opinion of the court was delivered by: WILL

HUBERT L. WILL, UNITED STATES DISTRICT JUDGE

 The National Basketball Association ("NBA"), acting through its Board of Governors, limits the number of games NBA teams may broadcast over "superstations." Superstations are independent, over-the-air television stations that broadcast in their local market areas and are also carried by cable systems to other parts of the country. WTBS in Atlanta, WGN TV in Chicago and WWOR in New York are all examples of superstations. The NBA's rules, including those limiting games on superstations, of which there have been several over the years, are enacted by vote of the NBA's Board of Governors, a body consisting of one representative from each of the 27 NBA teams.

 During each of the last five seasons, the NBA's superstation rules allowed every NBA team to broadcast up to 25 games on a superstation. But effective this season, the Board of Governors has adopted a new rule reducing that number from 25 to 20. Chicago Professional Sports Limited Partnership, owners of Chicago's NBA franchise, the Chicago Bulls, and WGN Continental Broadcasting Co. ("WGN"), to whom the partnership ("the Bulls") had licensed 25 Bulls games for this season, seek to enjoin the league from enforcing the new 20-game rule so that the Bulls may sell and WGN may buy rights to televise 25 rather than only 20 Bulls games for broadcast nationwide.

 This is an antitrust case. The Bulls and WGN allege that the league's decision to reduce the number of superstation games permitted to any team constitutes a horizontal agreement among the NBA teams to restrict output and to boycott superstations, in violation of Section 1 of the Sherman Act. 15 U.S.C. § 1.

 Having heard evidence and arguments over the course of five days and read the pleadings, the briefs, the relevant exhibits and designated deposition testimony submitted by the parties, we now enter our opinion, incorporating our findings of fact and conclusions of law as required by Fed. R. Civ. P. 52. The parties have submitted a joint stipulation of undisputed facts, which should be considered findings of the Court, though some of those facts may not expressly appear in this opinion. *fn1"

 This opinion is divided into fifteen parts. Parts I through VII discuss the structure of the NBA, the history of the NBA's television policies as well its current policies, the logistics of superstations, WGN's contract with the Bulls and television coverage of Bulls games in Chicago and nationwide. Parts VIII through XIII summarize the contentions of the parties and address each of those contentions on the merits. Parts XIV and XV contain concluding remarks.

 For the reasons set out in this opinion, judgment will be entered for plaintiffs, the Bulls and WGN. The NBA's five-game reduction in the number of superstation telecasts allowed to each team, from 25 to 20, is an unreasonable restraint of trade. A separate order recording the judgment and a permanent injunction, restraining the NBA from enforcing its present 20-game restriction on superstation broadcasts, will be entered.

 I

 The NBA is a joint venture of its 27 professional basketball teams, based in cities and television markets as large as New York, Los Angeles and Chicago and as comparatively small as Charlotte, North Carolina and Salt Lake City, Utah. As joint venturers the teams have understandably entered into agreements about how many players are allowed on the basketball court, how high the basket should be, how many seconds should run on the shot clock and the like. Obviously, agreements on game rules are essential to producing basketball games at all. But the teams have also entered into league-wide agreements on a great many other subjects, including collective bargaining with the players, the college draft, group insurance, the licensing of products, and television contracts with the national networks. Those agreements are not strictly necessary to produce basketball games. The NBA is not simply a rule-making organization. It has an economic significance of its own and controls some competition between the teams off the court as well as on it.

 In several areas, the league has virtually preempted economic activity by the individual teams. In marketing, for instance, the merger of the teams into the league is almost complete. It is undisputed that the league controls the trademarks and logos of all the teams and that, outside their own arenas, the teams have few if any rights to license the sale of merchandise -- jackets or pennants or posters -- with team or NBA logos. Through licensing agreements with the league's marketing arm, NBA Properties, Inc., each team has granted the league the sole and exclusive worldwide right, subject only to narrow exceptions, to license and use its "symbols." Several other facts are also undisputed: each team has granted all rights in the film footage of its games to NBA Properties, and no team may produce and sell a home video involving NBA basketball to the public, except as permitted by the NBA. Highlight videos of the Bulls superstar Michael Jordan, the Mikhail Baryshnikov of basketball, are, for example, licensed by the NBA not the Bulls. As a final example, in 1990, when Lee Auto Parts in Chicago wanted to run a sweepstakes promotion using Bulls tickets as prizes, the Bulls were required to submit their agreement with Lee to the league office for advance approval. SF 69, 70, 87, 103-105.

 In substantial measure, the league acts as an integrated firm. Revenues generated from contracts for licensed products entered into by the league are split evenly among the teams, and the even split is redistributive. Not all teams contribute equally to sales. Last year, Bulls paraphernalia outsold every other team's products. SF 81. Notwithstanding, the Bulls receive the same 1/27th draw of the net as all the other teams.

 The teams also pool and market some of their television rights jointly, through the league, under an exemption from the antitrust laws granted by Congress. See 15 U.S.C. §§ 1291-1295 (the "Sports Broadcasting Act"). For this season and the next three seasons, the NBA has sold broadcast rights, on behalf of all the teams, both to the National Broadcasting Company ("NBC") and Turner Network Television ("TNT"), a cable network. Revenues from those contracts will be shared jointly and the share to each team from the combined rights fees received from NBC and TNT this season will come to $ 6.8 million. SF 388; Tr. at 1079.

 These fees from NBC and TNT represent the single largest source of shared revenues among the teams, and their agreement to pool certain TV rights, sell them jointly, and split the proceeds evenly reflects a kind of nonaggression pact among all the teams, an agreement not to compete in an area where they otherwise might. In a free open market, with each team doing its own bargaining, strong teams like the Bulls, the Detroit Pistons, the Los Angeles Lakers and the Boston Celtics would command more money this season than weaker teams like the Sacramento Kings or the Miami Heat. Under their agreement to pool TV broadcast rights, however, each team will receive the same amount. Whether the strongest teams could negotiate on their own for as much money as their pro rata share of what the league has obtained for them by pooling their rights is an open question.

 The income of all the teams is significantly enhanced by the revenues from their joint projects. Combining the revenues from all their joint projects, broadcast and other, each team will receive nearly $ 8.5 million from the league this season as shared profits of their joint venture. For many teams the revenues from the shared ventures may mean the difference between operating in the black and net operating losses. The NBA Commissioner, David Stern, estimated that but for the $ 8.5 million they will receive from the league, 20 of the 27 teams would run net operating losses this season. Stern also testified that, even with the shared revenues, one or two teams might still finish the season in the red. Tr. at 917, 1076.

 It is not disputed, and it is plain from the financial figures, that the prosperity of the league currently depends on the volume of the shared revenues generated by the league's economic activity on behalf of the teams and particularly on the revenues generated by the broadcast contracts with the national networks. As has been mentioned already, of the $ 8.5 million the league will distribute to each team this season, $ 6.8 million or 80% is attributable to revenues from national television contracts negotiated by the league.

 Nevertheless, and despite the substantial economic collaboration among the teams, the NBA is only a partially integrated venture. The level of contractual integration among the teams lies somewhere in between what would be tolerated under the antitrust laws among wholly separate firms, on the one hand, and what one would expect from a fully merged or integrated firm on the other. Joint enterprises like NBA Properties, Inc. and the network contracts with NBC and TNT show the teams acting together as a single economic unit, pooling resources, agreeing not to compete with each other or the league and sharing the risks and benefits of their joint endeavors. But the teams also remain very much separate entities, each one with economic significance in its own right.

 Head-to-head direct competition in the marketplace is clearest in New York and Los Angeles. The New Jersey Nets compete against the New York Knicks and the Los Angeles Lakers compete against the Los Angeles Clippers in the same geographic market. All the teams compete for media attention, for coaching staffs and front office personnel and, with some restraints, for players.

 The most significant sign of their economic independence is the fact that all the teams calculate their own profits and that what they earn on their own and keep for themselves is more substantial than what they produce together and share. In four of the last five years, from the 1985-86 season through 1989-90, the average NBA team collected slightly better than 50% of its total revenues from a single source, gate receipts for regular season home games. In the fifth season, 87-88, the proportion was 49.1%. JX 47. Only minuscule amounts of those revenues are shared. This season, each team will keep 94% of its regular season home gate, giving up only 6% to the league. SF 63. The teams earn more independently than they receive in shared revenues.

 Although Commissioner Stern estimated that the $ 8.5 million that the league will distribute to each team this season may effectively double the gross revenues of the poorest teams, he also said that same amount would represent only 15-20% of the gross revenues of the richest teams. Tr. at 916. Last year, when the distribution from the league was much smaller, because television revenues from the league's national television contracts were less than half of what they will be this year, the proportion of its gross revenues which any team received from the league was also smaller. Shared revenues are not the primary source of income for many teams.

 It is instructive, too, that fifteen to fifty percent income from revenue sharing is not the rule among professional sports leagues. Some leagues show greater economic integration than the NBA does. Thus, revenue sharing among the teams in the National Football League ("NFL") runs much deeper than in the NBA. Of the total revenue of the 28 NFL clubs, roughly 70% flows from the league's network contracts and is shared equally. The NFL teams, unlike NBA teams, share their gate receipts 60-40 between the home team and the away team. The Commissioner of football, Paul Tagliabue, estimated that only 5-10% of an NFL team's revenues "is not shared in any way." Tagliabue dep. at 69-71.

 All NBA teams depend on their own entrepreneurship and some teams do much better in the marketplace than others. The disparities among the teams' year-end financial statements are substantial. Last season, for instance, the Lakers recorded total revenues of $ 42.8 million dollars, which is more than three times as much as the Washington Bullets, who grossed a league low, $ 11.9 million. JX 47. For the 26 teams other than the Lakers, average revenues for the '89-90 season were $ 21 million -- almost twice as much as the Bullets grossed but not even half of what the Lakers made. JX 47.

 As a general trend, these disparities in revenues have an impact on competition on the court. Teams with impressive records tend to show bigger revenues than teams in the cellar. On the very most basic level, going to the playoffs means more games, and therefore more gate receipts, and more fan following and therefore higher rights fees from local broadcasting (which belong 100% to the teams) -- in other words, more money. In 1989-90, the league champions, the Pistons, collected playoff revenues of $ 2.9 million dollars, net of the playoff revenues they shared with the league. JX 47. In addition, and to complete the circle, more money means a better chance at making the playoffs again. The richest teams enjoy competitive advantages on the court over the poorest teams -- in the ability to bid for free agents or to pay to keep their own players who opt for free agency, and so field a strong team; in the ability to charter flights for away games, and so field an alert team; in the ability to hire top notch staffs, and so field a well-coached team, and more.

 The teams in the NBA cooperate in some ventures, but they engage in many others, on the court and off, as independent firms.

 II

 This season the NBA will gross more than $ 180 million from its network television contracts with NBC and TNT. NBC will carry 22 regular season games, TNT will carry 50 and each network will carry up to 30 playoff games. Time was, however, that the league's appeal to the networks was nowhere near what it is now. In 1981, CBS aired the NBA's premier event, its championship series, on tape delay rather than carrying it live and in prime time. League revenues from television, over-the-air and cable, were less than $ 23 million in 81-82, increasing to 27.5 million in 82-83, but in both cases amounting to less than 16% of the projected revenues for this season. JX 42; DX 368.

 Today, the league is in full blooming financial health. Total league revenues this season are projected at $ 700 million. In 1982, they were $ 128 million. Tr. at 645. The economic resurgence of the NBA is nothing short of phenomenal, and as the league explains it, "while a number of factors have contributed to the resurgence of the League, one of the principal reasons for its current success has been a sound and consistent television policy." NBA's Proposed Findings of Fact para. 77, p. 52. NBA Commissioner David Stern has obviously done a superb job.

 A significant strategic part of the league's television policy since 1982 has been to restrict the number of games in the market which compete with the league's national contracts. In particular, the league has taken several steps to limit local broadcasts and the independent rights of the teams to sell games, in order to maximize the value of the rights it sells to the national networks for national broadcast.

 Beginning in 1979, the NBA's Board of Governors resolved that all future television contracts entered into by the teams would be made "subject to the Constitution, Bylaws and all other rules and regulations" of the league, "as they presently exist and as they may from time to time be amended," subject to "the terms of any existing or future" television contracts entered into by the league and subject to review by the Commissioner to guarantee compliance. At the same time, the Board of Governors also adopted a resolution reserving to the league "the exclusive right to enter into contracts for the direct telecasting of NBA games by cable systems located outside the territory of all members." That resolution effectively voided a national cable contract that had been signed by the New York Knicks. The league then entered into its own national cable contract, on behalf of all the teams, with the USA Cable Network ("USA"). USA promised to pay $ 1.5 million in fees over three seasons, 1979-80 through 1981-82. DX 368.

 The next year, 1980, the Board of Governors adopted a further resolution, limiting each team to 41 over-the-air telecasts for the upcoming 1980-81 season. Every team plays 82 regular season games, and during the 1979-80 season at least one team, the Atlanta Hawks, had televised all 82 of its games on over-the-air television. At the same meeting, the teams also empowered the Commissioner "to take all steps deemed by him necessary to ensure compliance" with the television rules they had adopted, including the authority "to direct the forfeiture" of any game broadcast in violation of those rules, "to invoke and apply all sanctions and penalties available to him under the NBA Constitution," and to impose a fine of up to $ 100,000 for each violation or "for any refusal by any team to comply with any directive issued by the Commissioner in the implementation or enforcement of such" television rules.

 The Bulls voted for both the 41-game rule and to grant the Commissioner the authority to enforce TV resolutions. Subsequently, they also voted for the renewal of those resolutions in every year through 1985, when, again with their approval, both resolutions became standing enactments.

 In June 1985, the Board of Governors put further restraints on superstations, this time voting to limit the teams to 25 superstation games a year, beginning with the 85-86 season, down from the 41 that had been allowed in each of the previous four seasons. The Bulls voted for the resolution. In October 1989, the governors approved a permanent resolution "blacking out" superstation games on nights when an NBA game is shown nationally on cable as part of the league's national cable package, which, by this time, had moved from USA and ESPN to TNT. Most recently, in April 1990, the Board of Governors voted, over the objections of the Bulls and the New Jersey Nets to reduce superstation broadcasts by any team from 25 to 20, giving rise to this lawsuit.

 The NBA's television strategy has not been mimicked by other professional sports leagues. The NBA, the NFL and Major League Baseball have each approached selling and regulating TV rights in different ways. All three leagues are currently in the first year of four-year contracts with the networks, running through their 1993 seasons, and each league read and played the market differently. Still, the networks agreed to substantial increases in rights fees for all of them.

 The NFL negotiates all television rights deals for its teams and prohibits them from negotiating television contracts on their own, with the exception of contracts for certain preseason games. The NFL's teams retain no rights and no games. SF 331. In addition, while the NBA has, since 1984, put its games on two national networks, one over-the-air and one cable, the NFL has opted to spread its coverage. This season, and through 1993, ABC is slotted to air NFL football on Monday nights. CBS will air NFC games on Sunday afternoons, while NBC airs the AFC. TNT will carry Sunday night games for the first half of the season, and ESPN picks up Sunday night for the last half of the season. All regular season NFL games are produced for network television; every NFL game is televised every week under one of the NFL's five network contracts. There are no superstation broadcasts of NFL games.

 The NFL's new contracts are its most lucrative ever and the NFL was able to negotiate the increases despite the fact that ratings for NFL games, as a percentage of total households, have declined. Tagliabue at 75.

 The NBA's broadcast strategy also differs from Major League Baseball's. Baseball recently signed a contract with ESPN for 175 games a season for four seasons, in its first move ever into national cable rights and exposure. At the same time, baseball has moved to limit its over-the-air exposure. Baseball's new 1990-93 deal with CBS gives the over-the-air network only 16 regular games this season, down from 40 games last year, leaving 24 new Saturday afternoon slots open to the teams. By contrast, since 1982 the NBA has steadily reduced the size of its national cable package from 80 games to 50 and upped its over-the-air package from 7 games to a possible 26, aiming for more exposure on the major over-the-air networks and less on national cable. DX 368.

 Major league baseball regulates superstation broadcasts by imposing a surcharge rather than limiting the number of games directly.

 The NBA's television rules, as they are presently on the books, may be summarized as follows.

 Under NBA rules each team may televise up to half (41) its regular season games, home or away, over any commercial over-the-air television station other than a superstation located in its "home territory." The teams keep 100% of the revenues from these local home territory, over-the-air broadcasts. A television station falls within a team's home territory if its "transmitters are located in the team's home state and/or in the area consisting of 150 miles from the corporate or unincorporated team city of operation," subject to some adjustments in cases where the home territories of two nearby teams overlap. SF 250. The teams are also allowed to sell over-the-air rights to a number of stations in isolated areas, remote stations outside NBA cities which have historically carried certain teams and which have been grandfathered in as exceptions to the rules.

 There are very few, mostly negligible, limits on the number of games a team may televise over local cable in its "local market," meaning within a 75 mile radius of the corporate limits of the team's home city. The teams keep 100% of the revenues from these local market cablecasts.

 Teams may also contract for cablecasts in an apron area up to 75 miles beyond the city-plus-75-mile-radius, but revenues from such "extended market" broadcasts are shared with the league. The league has also authorized contracts beyond the extended market, meaning contracts with regional cable systems, for which it charges a per subscriber fee.

 Each team may, under the new rule, televise up to 20 games on a superstation. Superstation games count toward the tally of over-the-air games: a team that televised 20 superstation games would have 21 left to show on another local over-the-air station, not 41. Superstation games are the only nationally transmitted NBA games not controlled by the league. The teams currently keep the revenues from their contracts with the superstations. Superstation broadcasts, however, also generate royalty payments from cable operators who pay for the right to retransmit superstation games. The cable operators make these royalties payments to the Copyright Royalty Tribunal which then distributes them to copyright owners. The league receives these payments from the royalty tribunal on behalf of the teams and distributes them evenly among the teams. In 1990, the NBA received a distribution of $ 3,960,345 from the Copyright Royalty Tribunal, largely though not entirely in compensation for NBA games televised on superstations, during the 1988 calendar year. SF 286.

 The teams may not televise any game over-the-air, on cable, or on superstations opposite an NBC game and may not broadcast the same game carried by NBC at all, even on tape delay. The teams are not allowed to air a game on a superstation opposite a TNT game but may telecast even the same game TNT is carrying, head-to-head with TNT, on strictly local over-the-air TV or on local cable.

 That exhausts the options open to the teams, individually. National network contracts, national cable contracts, and regional cable contracts are currently negotiated by the league. We turn now to those contracts.

 IV

 Last season marked the final year of a four-year agreement between the NBA and CBS. That agreement produced revenues last year of $ 47.5 million, for 16 regular season games and 26 playoff games. Last season was also the final year of a league contract with TNT. TNT carried 51 regular season games and 30 playoff games last season, for which it paid $ 27 million. DX 368.

 This year television revenues will be a whopping 241% higher. As the result of two new four-year deals, negotiated by the Commissioner, one with NBC and one with TNT, the league will receive $ 180 million this year, to be divided 27 ways among the teams. The new NBC and TNT contracts are clearly coups for the Commissioner, the league and the teams.

 Under the new contract, NBC will pay $ 601 million for exclusive over-the-air rights to up to 26 regular season games plus 30 playoff games, including the finals, over each of the next four seasons. The network must carry at least 17 regular season games each season. It has elected to carry 22 this season. NBC also agreed to provide $ 40 million of on-air commercials for NBA games over the next four years, 60% of which must be shown during prime time. NBC receives first pick of NBA games, before any other TV network or station, and receives exclusive rights to the games it selects. NBC games cannot be broadcast by another television network or station. NBC is not required to carry the Bulls or any other team, but may not show any one team more than seven times a season. The Bulls, the Lakers, and the Pistons will each appear seven times this season and the Celtics six.

 There were effectively no price negotiations with NBC. Before signing with NBC, the NBA had offered its package to the incumbent rights holder, CBS, for $ 600 million plus promotionals. CBS refused and the league then went to NBC and offered the same contract on the same terms. But CBS, pursuant to an agreement with the NBA, retained a cleverly designed variation on a right of first refusal, which worked wonderfully for the NBA. Under the terms of that agreement, if NBC or any other network came forward with a bid in an amount less than the NBA's last demand to CBS, $ 600 million, then CBS got another turn to bid and was guaranteed the contract so long as it matched the new offer from the second network. This arrangement was made clear to NBC and, unwilling to bid even $ 1 less than $ 600 million and thereby take the risk that the contract would go to CBS, NBC bid $ 1 million more and landed the contract for itself. There was no dickering.

 The NBA contract appears to be a success so far for NBC, which has already sold 80% of its NBA advertising inventory this season, at about twice the rates CBS was charging last year. DX 470. Still, and despite the strength of its advertising sales, NBC plans, as indicated, to carry only 22 regular season games this season, ...


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