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CHICAGO PROFESSIONAL SPORTS L.P. v. NBA

January 6, 1995

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



The opinion of the court was delivered by: HUBERT L. WILL

 In January 1991, we enjoined the National Basketball Association ("NBA") from reducing to 20 from 25 the number of games involving the Chicago Professional Sports Limited Partnership's NBA team, the Chicago Bulls ("Bulls"), that WGN Continental Broadcasting Company ("WGN") could televise as a superstation. Our opinion and decision are reported in 754 F. Supp. 1336 at 1336-64 (N.D. Ill. 1991) ("NBA I"). We there set out at some length the history of the NBA and of superstation telecasts of NBA games by the three superstations, WTBS, Atlanta, WGN, Chicago and WWOR, New York. We also discussed the various other arrangements for broadcasting and televising NBA games including national and local television and national and local radio broadcasting. The national and local TV arrangements included both over-the-air and cable transmissions.

 In addition, we described the NBA and its teams' operations and relations in general, the extent to which they operate individually and retain the net revenues from their individual operations, and the extent to which they operate jointly through the NBA acting as their agent. The net revenues from these joint operations are distributed periodically by the agent, the NBA, in equal shares to each member team. The joint operations include both national over-the-air and cable televising and radio broadcasting of NBA games but not local or regional over-the-air or cable televising or radio broadcasting of games involving a local team.

 We further pointed out that the NBA through joint action of the teams has established numerous rules and regulations governing many subjects including how many players are allowed on the court, the height of baskets, timing limitations, the number of players a team may carry, the size of the court, facilities which the home team must provide, and a host of other game and operational rules.

 The league, again acting as agent for the member teams, also handles all sales, outside a team's home arena, of merchandise and memorabilia utilizing team or NBA logos. Again the net revenues are distributed equally among the member teams.

 Finally, we also analyzed at length the application of the federal antitrust laws, as well as possible exceptions thereto including the Sports Broadcasting Act ("SBA"). We concluded, and the court of appeals affirmed, that, consistent with the United States Supreme Court's holding in National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104 S. Ct. 2948, 82 L. Ed. 2d 70 (1984), the NBA's proposed reduction in the number of Bulls' games over WGN was a naked and unreasonable restraint on output and distribution which violated the federal antitrust laws and was not exempted therefrom by the Sports Broadcasting Act.

 Except for a number of formal changes and the events which have taken place subsequent to our 1991 opinion and which we will discuss later, the NBA, the member teams and the relationship between them, including the many rules and regulations, remain substantially the same as described and found in our 1991 opinion, and we will not repeat them here but will adopt them as part of our current findings of fact.

 The parties have stipulated some 481 uncontested facts. We adopt all of them except numbers 4-6, 30-31, the last sentence of 88, 104-105, 110-111, 118-119, 122-125, 129-135, 145-150, 154-160, 223, 248-249, 251-252, 333, 368, 439-445, 447, which are either irrelevant to the issues before us, or which have previously been found in our 1991 opinion and are, therefore, repetitious. *fn1"

 In addition to the foregoing, certain narrative additional facts may be found in the course of this opinion.

 Our 1991 decision and the injunction were affirmed by the Seventh Circuit. 961 F.2d 667 (7th Cir. 1992) ("NBA IA"). When the Supreme Court denied certiorari, 113 S. Ct. 409 (1992), the decision and injunction became final.

 Following the entry of the injunction prohibiting the NBA from reducing the number of Bulls games WGN could carry from 25 to 20, the NBA agreed that for the 1991-92 season the number of games superstations could carry would be 30. That agreement was extended by the NBA for the 1992-93 and 1993-94 seasons. In all three seasons, WTBS and WGN televised 30 games. For the current 1994-95 season, the NBA has agreed only to the 25 games specified in the injunction.

 The earlier proceedings dealt only with the question of whether or not the NBA could reduce the number of Bulls games which could be televised over WGN from 25 to 20. The NBA now seeks a decision that, notwithstanding the earlier decision and injunction, it may prohibit any distribution of Bulls games by WGN or, if not, that it may impose a superstation fee or tax on the transmission of Bulls' games by WGN.

 In the course of its opinion affirming our decision and injunction, the court of appeals suggested a number of actions which the NBA might take in an effort to achieve its objectives, while at the same time avoiding the two decisions and the injunction, as well as the application of the antitrust laws.

 Notwithstanding that the NBA had voluntarily agreed to 30 Bulls games being televised over WGN in the three seasons, 1991-92, 1992-93 and 1993-94, the appeals court's suggestions as to how the NBA might prevent all such telecasts effectively eliminated the very real possibility of a negotiated settlement of the case. After stating, in its discussion of the SBA, that "Recognition that special interest legislation enshrines results rather than principles is why courts read exceptions to the antitrust laws narrowly, with beady eyes and green eyeshades," NBA IA, 961 F.2d at 671-72, the court made a number of suggestions to the NBA as to how it might prohibit and prevent national distribution of Bulls' games by WGN without violating the antitrust laws.

 Among the suggestions were the following:

 
1. Establish that the league is a "single entity" so that whatever it does is unreviewable under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S. Ct. 2731, 81 L. Ed. 2d 628 (1984) and its progeny.
 
2. Transfer all team copyrights to the NBA.
 
3. Invoke the protection of the SBA by transferring all telecast rights of NBA games whether national or local to the NBA and then put a cap on the number of national telecasts of NBA games in the contracts with NBC and Turner.
 
4. Demonstrate that a limitation on the distribution of Bulls' games on WGN "expands output, serves the interests of consumers and should be applauded rather than condemned." NBA IA, 961 F.2d at 673. To do this, the court suggested that the NBA might try to establish that keeping popular games off superstations helped weaker teams attract support of their local audiences and increase their gate receipts, which is a principal source of team revenues, while at the same time attracting larger audiences, an expansion of output.
 
5. Attempt to establish that the elimination of all Bulls' games on WGN will cause WGN and the Bulls to suffer no "antitrust injury," i.e., loss that comes "from acts that reduce output or raise prices to consumers." NBA IA, 961 F.2d at 670. In this connection, the court speculated on who, under antitrust law, are the "consumers" of TV sports broadcasts, sports fans who watch the games or advertisers who buy the opportunity to persuade viewers to purchase their products and suggested that this question "be explored further in the proceedings yet to come." Id.
 
6. Have the league impose a superstation fee or tax which would produce income for the teams since it would be shared equally and would eliminate any "free-riding" by the Bulls and WGN.

 Not surprisingly, the NBA almost immediately undertook to implement the various suggestions. Within a few months, it moved to have the injunction lifted and vacated, representing that it had taken the steps suggested by the court of appeals.

 Except for the actions taken in an effort to adopt the court of appeals' suggestions, however, the NBA remains today as described in our earlier opinion, a league of professional basketball teams, each individually owned and controlled except as affected by league rules. Moreover, a limitation on or a prohibition of distribution of any Bulls' games over WGN is still a naked restraint. Accordingly, a logical approach to a decision in this case is, we believe, to examine the changes which the NBA has made and which it contends entitle it to prohibit the telecasting of any Bulls' games over superstation WGN. If we conclude that such a blanket prohibition is not in violation of the antitrust laws, there will be no necessity to consider the lesser restraints which the plaintiffs challenge, the superstation blackout or the superstation tax. We proceed then to consider the significance and effect of the several changes.

 I.

 THE SINGLE ENTITY THEORY

 In NBA I, we discussed, in detail, the organization of the NBA and its member teams. We examined the rule making authority and the economic significance of the league, along with the extent to which the teams cooperate and compete to promote their combined and individual interests and success. We concluded that the NBA is a joint venture of rival teams, necessarily cooperating in the production of games, yet competing for media attention, fan support, general managers, coaching staffs, players, championships, prestige and, last but not least, profits. NBA I, 754 F. Supp. at 1339-42. The court of appeals affirmed this analysis, yet suggested, without indicating what of significance had not been considered, that the parties should "join issue" more fully in the proceedings to follow. NBA IA, 961 F.2d at 672-73. The parties obliged, and we once again consider the structure of the NBA.

 The NBA relies upon Copperweld, 467 U.S. 752, 81 L. Ed. 2d 628, 104 S. Ct. 2731, and its progeny for the proposition that, despite its 27 or more independently owned and managed teams, it is a single enterprise. It argues that Copperweld, which held that a corporation and its wholly owned subsidiary are a single enterprise for purposes of § 1 of the Sherman Act, can be broadly applied to exempt the NBA from antitrust liability. We disagree.

 The holding of Copperweld is quite narrow, and rests solely upon the fact that a parent corporation and its wholly-owned subsidiary have a "complete unity of interest," in which the "the subsidiary acts for the benefit of the parent," and "the parent may assert full control at any moment." Copperweld, 467 U.S. at 771-72. The NBA maintains that the "economic reality" of its operations demonstrates such a collective interest. An analysis of the facts, however, discloses that the singularity of purpose and control underlying Copperweld is conspicuously absent in the relationship between the NBA and its member teams.

 The NBA urges that subsequent case law, particularly, City of Mt. Pleasant v. Associated Elec. Co-op., Inc., 838 F.2d 268 (8th Cir. 1988), has broadened the scope of Copperweld's protection against antitrust violation to include other legally distinct, yet substantively unified, business organizations. Rather than supporting the argument that the NBA is in reality a single entity, however, these later decisions highlight facts that distinguish the NBA from those entities treated as single enterprises under antitrust law. Specifically, as Mt. Pleasant makes clear, a single enterprise does not exist when any of the joint members has "pursued interests diverse from those of the cooperative itself." By diverse, the court went on to state "we mean interests which tend to show that any two of the defendants are, or have been, actual or potential competitors." Mt. Pleasant, 838 F.2d at 276; see also Sullivan v. National Football League, 34 F.3d 1091, 1099 (1st Cir. 1994).

 As noted above, and at length in NBA I, the teams comprising the NBA pursue the very type of diverse interests that Mt. Pleasant indicated must be absent. The NBA teams are actual competitors, not only on the baseline for points, but also off the court in the market for players, coaches, managers, advertising dollars, fan support, ticket sales, and overall revenues. They keep their own profits and generally earn far more for themselves than they do through their combined efforts as a league. *fn3" Winning season games, playoffs and championships translates into greater financial prosperity for the victors. See Tr. 5998-6000 (Colangelo). One team's gain on the court is thus generally another's loss at the bank, and while some cooperation is necessary, the profit seeking interests of one team are often contrary to those of other teams. *fn4"

 Similar to the lack of "complete unity of interest," is the NBA's limited control over the actions of the individual teams. Each team is independently owned and operated, elects its own directors and officers, hires its own employees, conducts its own accounting, keeps its own profits, makes its own financial and investment decisions, and generally succeeds or fails on its own. Some teams have an interest in the arena in which they play. Others do not. While the teams have consented to be bound by their joint venture agreement and certain rules and regulations adopted by the Board of Governors *fn5" , the individual, corporate and, in one instance, the Boston Celtics, public team owners, do not report to the league, nor does the league have the power to review or disapprove their business decisions. Tr. 3962, 4405-13 (Stern). Moreover, the NBA Constitution specifically prohibits any one team from exercising control over another. JX 69 at 6044.

 The NBA claims that, regardless of each team's independent management, profit motives, ownership and control, the individual teams have no economic significance of their own. In support, it argues that the teams are nothing if not a creation of the league, and that "no team, standing alone, has the productive capacity to produce a single NBA game, much less a season of integrated games leading to a championship." A look at some historical facts, however, is revealing. The NBA was not the first professional basketball league, but instead was formed in 1949 by the merger of two pre-existing leagues, the Basketball Association of America ("BAA") and the National Basketball League ("NBL"). SF P 383. Therefore, rather than the teams being creations of the league, the NBA can more accurately be described as a creation of the teams, who can dissolve it at any time by a three-fourths vote. JX 69 at 6061.

 Equally instructive is the fact that a separate professional basketball league, the American Basketball Association ("ABA") competed successfully with the NBA from 1967 to 1976. SF PP 414-23. Professional basketball teams have, therefore, "produced" games both prior to and independent of the NBA, and conceivably could do so without the NBA again in the future. *fn6" Unlike the parent and subsidiary in Copperweld, the NBA is at its core a joint venture of "two or more entities that previously pursued their own interests separately." See Copperweld, 467 U.S. at 790.

 There is no doubt that the NBA, like any sports league, has cooperative characteristics. Mutual agreement is necessary to create the "product" of competitive basketball games and to insure its quality. *fn7" Moreover, the member teams undoubtedly derive genuine financial benefit from their combined efforts. *fn8" The NBA confuses, however, the necessary and beneficial cooperation of a joint venture, with the unified interests of a single entity. When independent actors join in order to achieve mutual benefit, or even to accomplish what they could not on their own, the result is not automatically exempt from antitrust scrutiny. NCAA, 468 U.S. at 133. Rather, it frequently mandates particular scrutiny as in the case of competitors who join together to fix prices. Thus, while the unique needs and structure of the NBA demand that we carefully review its joint agreements for procompetitive effects, they do not support the conclusion that the NBA is a single entity. *fn9"

 Although we are the first court to consider the organizational status of the NBA under § 1 of the Sherman Act, we are not the first to consider whether sports leagues should be treated as single entities. Scholarly debate has been plentiful and arguments similar to those presented to us have been made in relation to other sports organizations. See McNeil v. National Football League, 790 F. Supp. 871 (D. Minn. 1992). *fn10" We have reviewed these discussions and find the better reasoned ones support the result reached here. Of particular relevance to our decision, we note Sullivan v. National Football League, 34 F.3d 1091 (1st Cir. 1994), in which the First Circuit recently rejected substantially identical arguments about the application of Copperweld to the significantly more integrated National Football League. *fn11"

 After over nine weeks of trial, more than 1400 exhibits, and lengthy submissions, we find no material factual changes in our original analysis, nor in the NBA, that lead to anything but the conclusion previously reached -- the NBA is a joint venture of competing teams capable of colluding in violation of § 1 of the Sherman Act.

 II.

 THE EFFECT OF THE TRANSFER OF THE TEAMS' COPYRIGHTS TO THE NBA

 Both our earlier opinion and that of the court of appeals pointed out that, while the NBA contended the contrary, the individual teams apparently owned the copyrights to their games, programs and other copyrighted products. We noted that, while two teams obviously own the copyrights to any particular game, either of two joint owners of a work may grant a non-exclusive license to a third party without the permission of the other and that all NBA teams do exactly that in connection with the television and radio broadcasting of their games and the sale of other copyrighted products involving more than one team.

 We also noted that the NBA in all of its contracts acts only as an agent for the teams, not as a principal or copyright licensor. This includes television and radio over-the-air and cable contracts, souvenir, memorabilia and all other contracts with manufacturers and distributors of copyrighted products. Acting as agent is important to the NBA and the member teams because, as agent, the NBA is not subject to federal and state income and other taxes on the many millions of dollars it receives each year under all the various contracts.

 As previously noted, in its multi-million dollar contracts with NBC and cable TV companies, as well as with the manufacturers and distributors of other copyrighted products, the NBA has always acted as agent for the various teams. Since ostensibly acquiring ownership of the copyrights, the NBA has entered into a number of new contracts including ones with NBC and the Turner TNT cable network and superstation WTBS. Notwithstanding that the NBA now purportedly owns the copyrights and would presumably license the distribution of copyrighted games, the new contracts carefully identify the NBA, not as a licensor or principal, but again as agent for the teams. When we questioned counsel for the NBA during oral argument about this apparent inconsistency, the possible tax implications and whether or not the copyright assignments were substantive or merely nominal, it was suggested that we should recognize that the NBA owned them and could prohibit any team from entering into any contract involving copyrighted NBA products, even though the league itself did not purport in its own contracts to act as the owner and licensor of the copyrights. And so far as any tax implications were concerned, we were advised that they should be no concern of ours in evaluating the significance or lack thereof of the copyright transfers, but that the NBA would handle any tax questions when and if the issues arose. Tr. 8153, 8162 (Rauchberg).

 The ultimate fact is that there has been no change in either the teams' rights to enter into contracts involving local and regional TV or radio transmission of NBA games and the sale of other copyrighted products, or in the league's continuing in all of its contracts to act as agent for the teams and not as the owner and licensor of the copyrights.

 The court of appeals in its opinion pointed out that "We want to know the effects of the TV policy on consumers' welfare, not whether the league possesses sufficient contractual rights that it has become the 'owner' of the copyright." NBA IA, 961 F.2d at 674. We conclude from all of the foregoing that the nominal transfer of the various teams' copyrights to the NBA does not immunize it from the application of the antitrust laws.

 In this connection, it should be noted that the NBA claims that, as nominal owner of the copyrights in all NBA game telecasts, it has a congressionally-granted right to license or not to license whomever it chooses, and its decision to license some telecasters and not others is beyond antitrust challenge. The NBA further argues that joint ownership does not change the nature of these rights, and in support of this statement quotes the Supreme Court in Interstate Circuit, Inc. v. United States, 306 U.S. 208, 227, 59 S. Ct. 467, 83 L. Ed. 610 (1939) ("Owners of the copyright of a motion picture film acquire the right to exhibit the picture and to grant an exclusive or restrictive license to others to exhibit it.").

 The NBA's reliance on Interstate Circuit is ill-placed. Although the Supreme Court recognized that copyright holders may grant an exclusive or restrictive license to others, the Court also noted that monopoly rights associated with a copyright have certain limits, restraint of trade in order to suppress competition being one of them. The Court stated, "an agreement illegal because it suppresses competition is not any less so because the competitive article is copyrighted. The fact that the restraint is made easier or more effective by making the copyright subservient to the contract does not relieve it of illegality." Id. at 230.

 In fact, "it is ... well settled that concerted and contractual behavior that threatens competition is not immune from antitrust inquiry simply because it involves the exercise of copyright privileges." Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147, 1185 n.63 (1st Cir. 1994), citing Eastman Kodak Co. v. Image Technical Services, Inc., U.S. , 504 U.S. 451, 112 S. Ct. 2072, 2089 n.29, 119 L. Ed. 2d 265 (1992).

 The NBA's decision to restrict the availability of games in the national television market has the potential to restrain trade beyond that contemplated by the copyright laws. The ultimate purpose of a copyright is to promote artistic creativity for the public good. See Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S. Ct. 2040, 45 L. Ed. 2d 84 (1975). To accomplish this end, the immediate effect of the copyright laws is to secure a fair return for the author's labor. Id. Thus, the "'rewards which flow to the [copyright owner] and his licensees from the suppression of competition ... must be reasonably adapted to secure pecuniary reward for the [copyright owner's] monopoly.'" United States v. Paramount Pictures, 334 U.S. 131, 144, 68 S. Ct. 915, 92 L. Ed. 1260 (1948) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 400, 68 S. Ct. 525, 92 L. Ed. 746 (1948)).

 The NBA is entitled to recover a fair return for its grant, as agent of the teams, of licenses in the telecast of basketball contests, but it is not entitled to exploit its copyrights by using that monopoly power in order to limit distribution and consumption of its product or to inflate artificially its value. Here, the restricted grants of games to NBC and Turner Broadcasting and the proposed elimination of all Bulls games on WGN have the effect of decreasing the number of games available in the national television market. Decrease in output is anticompetitive, not only because viewers have fewer games to watch, but also because decreased supply typically increases prices. See NCAA, 468 U.S. at 100. In addition to the increase in market value of the games, the prices of advertising during the games also rises. Such a result cannot be justified or excused simply by copyright ownership.

 Even if the copyright laws could protect the restriction in output contemplated by the NBA agreements, the NBA cannot seek shelter in the copyright laws unless it is acting in a way which is necessary to protect its property interest in its supposed copyright monopoly. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 20, 99 S. Ct. 1551, 60 L. Ed. 2d 1 (1979). Absent specific justifications for the restraints, the restriction in competition will not be shielded from the antitrust laws.

 As will be discussed later, the NBA has presented no evidence that it has suffered any economic loss as a result of the superstation telecasts of NBA games or would have sold more games to NBC, Turner or any other national TV distributor, or received more income if WTBS and WGN had not each distributed 30 NBA games for the past three years. The restraint is clearly not necessary to protect the teams' or the NBA's interests in their copyrights.

 III.

 THE EFFECT OF THE TRANSFER BY THE NBA OF ALL TELEVISION RIGHTS TO NBC AND THE APPLICATION OF THE SPORTS BROADCASTING ACT

 In NBA I, we concluded that the NBA was not entitled to antitrust protection under the SBA because "the Bulls, not the NBA, both owned and licensed the rights to the five games that were transferred to WGN and which the 5-game reduction would eliminate. This was not a sale or transfer by 'any league of clubs' but rather by the Bulls themselves, though subject to league approval, and the antitrust laws therefore apply." NBA I, 754 F. Supp. at 1350. We also concluded that while the SBA exempted from antitrust laws agreements to transfer telecasts, it did not exempt agreements to restrain or prohibit transfers of national broadcast rights.

 The court of appeals affirmed in NBA IA and agreed that the SBA applies only when a league has transferred rights to sponsored telecasting and therefore it did not apply to the NBA's efforts to limit distribution by the Bulls of their games on WGN. The appeals court then suggested several ways the NBA might structure its agreements in an effort to come within the provisions of the SBA. In dicta, the court of appeals disagreed that the SBA distinguishes between transfers and prohibitions of transfers, exempting only the former from the antitrust laws. NBA IA, 961 F.2d at 670 ("We therefore disagree with the district court to the extent it thought that the Sports Broadcasting Act applies only when the league arranges for (or permits) telecasting of every contest"). Notwithstanding, it agreed that the SBA did not exempt the NBA's attempt to reduce distribution of Bulls games over WGN from the antitrust laws.

 At a meeting of the NBA Board of Governors, the teams passed several resolutions, apparently in an effort to capitalize on the suggestions made by the court of appeals. See JX 114. Relevant are the following resolutions:

 
(1) the members of the NBA amended the NBA's by-laws to provide that the copyright in all NBA game telecasts was reserved to the NBA, rather than to the individual teams.
 
(2) The members of the NBA authorized the NBA to enter into a new national television ...

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