US Soccer Federation Scores Big Win In Antitrust Lawsuit

US Soccer Federation Scores Big Win In Antitrust Lawsuit

The article below was originally published in the Ass’n: The Newsletter of the Trade, Sports & Professional Associations Committee, Spring 2018, by the American Bar Association.

Written by: Justin N. Fielkow

In Fall 2017 the North American Soccer League (NASL) filed an antitrust lawsuit against the United States Soccer Federation (USSF) after the governing body decided not to renew the league’s divisional sanction for 2018. The lawsuit has the potential to significantly alter the structure of soccer in the United States. After being dealt a series of setbacks in court, however, the NASL’s action currently faces long odds.

Background

The non-profit USSF is soccer’s official governing body in the United States.[ii] A member of the Fédération Internationale de Football Association (FIFA), the USSF, which was founded in 1913, governs amateur and professional soccer in the United States. As part of its regulatory role, the USSF has promulgated various tiered divisions, in which its member leagues and their clubs compete.[iii] A league’s tier designation is based on its ability to meet certain requirements or standards, including number of teams, geographic distribution of teams, market size of a team’s city, stadium capacity, as well as the minimum financial requirements for team owners. Major League Soccer (MLS) is the de facto top soccer league in America, and is the sole member league to be granted Division I status by the USSF.[iv] Other domestic leagues, such as the United Soccer League (USL — Division II), occupy other lower tiers in the divisional hierarchy.[v]

Prior to the USSF’s implementation of a divisional structure in 1995, the original North American Soccer League – which has no ties to the current NASL – operated from 1968 to 1984 in the United States and Canada.[vi] The old NASL (like the present incarnation) had no salary cap and players were contracted by individual teams. The league’s popularity grew rapidly, peaking in the late 1970s when the league’s premier franchise, the New York Cosmos, signed global superstar Pelé.

Yet without significant governance or safeguards in place, the old NASL suffered a rapid demise. Once the league started growing, new franchises were awarded quickly; however, this over-expansion, without sufficient vetting of ownership groups, led to cash-strapped franchises folding en masse. Owners in the former NASL were also spending sums on player salaries that could not be covered by league revenue.[vii] The Cosmos, in particular, spent lavishly on star talent. The result was unchecked competitive imbalance, as most owners could not keep pace with New York’s level of spending and those that tried lost millions of dollars spending significant amounts on aging stars in an effort to match the Cosmos’ success. Potential investors balked, attendance began to decline, and the league ran a collective debt in 1980 of about $30 million, with each team losing money.[viii] In 1985 the league shuttered and died, and the USSF was left with the dying embers of a fire, trying to figure out how to fan the flames.

Fast forward twelve years, and many of the decisions to run MLS in its current model stem from the desire to avoid the issues that led to the downfall of the original NASL.[ix] Instead of operating as an association of independently owned teams, MLS functions as a “single entity,” in which MLS owns all teams in the league but contracts with operator-investors (more frequently referred to as team “owners”) who manage teams and are entitled to certain potential benefits from running the teams.[x] The league imposes strict (and relatively low) salary cap limits. The closed system does not allow for quick expansion and limits overhead to avoid teams outspending their resources. Importantly, like most sports leagues in the United States and Canada but unlike most international soccer operations, MLS has a fixed membership and does not employ a promotion-relegation system.[xi]

With soccer’s popularity again on the rise, competition was inevitable. Accordingly, in 2009, the new NASL was formed, shortly followed by the inception of the USL in 2010.[xii] Both young leagues, since their formation, have been given a lower-division categorization compared to their professional counterpart, MLS, by the USSF.[xiii]

NASL’s Antitrust Lawsuit

The NASL’s Division II status has not sat well with the upstart league. For years the NASL has publically decried its divisional designation, implying that if it was not promoted to Division I it intended to challenge its status under U.S. antitrust laws.[xiv] Yet, the league has consistently failed to even meet USSF’s minimal requirements for Division II status, let alone Division I. For example, standards implemented by the USSF in 2014 require the NASL to field at least 12 clubs across three time zones in order to maintain its Division II sanction.[xv] The league, however, fielded only eight teams in 2017.[xvi] The USSF granted the league provisional Division II status in early 2017, but on September 1, 2017 the NASL was informed by the USSF that it would not be approved as a Division II league for 2018.[xvii]

On September 19, the NASL filed suit in the United States District Court for the Eastern District of New York against the USSF. The two-count complaint, filed by famed sports litigator Jeffrey Kessler, alleges that the USSF violated the Sherman Act, 15 U.S.C. §§ 1-2, by restraining competition in and monopolizing the market for professional soccer in the United States and Canada.[xviii]

In its complaint, the NASL claimed that the USSF – along with its co-conspirators MLS, USL and Soccer United Marketing (SUM – MLS’s marketing arm) – sought to insulate MLS and USL from competition with the NASL by “arbitrarily” maintaining and applying its divisional criteria.[xix] For example, the NASL asserted that under the USSF’s divisional criteria, there are European clubs that have successfully operated for decades that would be considered ineligible for Division I or even Division II status due to arbitrary requirements like stadium capacity and market size.

The NASL also argued that the USSF has implemented divisional standards that are intended to make it impossible for the NASL to compete in the professional soccer market in the U.S. and Canada.[xx] The governing body allegedly shielded MLS, with which it does business through SUM, from competition with other professional soccer leagues by sanctioning MLS as the sole Division I men’s professional soccer league in the U.S. and Canada. According to the NASL, the USSF has now sought to bar the NASL from even competing with the USL as a second-tier league by revoking the NASL’s Division II status for the upcoming year.[xxi]

In essence, the NASL’s lawsuit attacks the basic structure of modern U.S. soccer. It argues that the USSF, though its divisional standards, has created an artificial hierarchy of closed divisions. The NASL contrasts the USSF’s framework with the classification of professional soccer leagues by FIFA federations outside of the U.S., and condemns the domestic system as an anticompetitive, closed model. As such, the NASL requested a (i) preliminary injunction to maintain the status quo, preventing the USSF from stripping it of its Division II sanctioning as it moves forward into 2018; and (ii) a permanent injunction to eliminate USSF’s divisional structure, allowing leagues to operate without designations and without the Division I classification that, the NASL argues, gives MLS an unfair advantage.[xxii]

Preliminary Injunction

On multiple occasions now, the NASL’s arguments have fallen on deaf ears, with the federal district court and the United States Court of Appeals for the Second Circuit each denying the NASL’s motion for preliminary injunction.

Typically in order to obtain a preliminary injunction, a moving party must show (1) irreparable harm; (2) either a likelihood of success on the merits or both serious questions on the merits and a balance of hardships decidedly favoring the moving party; and (3) that a preliminary injunction would be in the public interest.[xxiii] In its November 4, 2017 ruling, the district court determined that the NASL had satisfied the first and third elements. According to the district court, the NASL had sufficiently established that it would suffer irreparable harm because it would lose potential investors and likely even cease to exist if the USSF did not approve its Division II status for 2018.[xxiv] The district court also held that granting the NASL’s requested injunction would not harm the public interest.[xxv]

Yet, the district court concluded – and the Second Circuit concurred – that the NASL “failed to establish a likelihood of success on the merits, let alone a ‘clear showing’ of entitlement to relief.”[xxvi] Of particular importance was the courts’ determination that the NASL was required to meet a heightened legal standard. The purpose of a preliminary injunction is to preserve the relative positions of the parties, and courts often refer to preliminary injunctions as prohibitory or mandatory.[xxvii] Prohibitory injunctions maintain the status quo pending resolution of the case; mandatory injunctions alter it.[xxviii]

The Second Circuit held that the status quo between the parties was one in which the USSF annually decides which divisional designation applies to the NASL and that designation never lasts beyond one season of play.[xxix] If the court were to direct the USSF to grant a particular divisional designation for 2018 and beyond, it would be altering the status quo relationship between the parties. The court therefore concluded that NASL sought a “mandatory injunction,” for which it must show “a clear or substantial likelihood of success on the merits” – a higher standard than required for a prohibitory injunction and one in which the “balance of hardships” alternative was inapplicable.[xxx]

Once the heightened legal standard was established, the NASL was required to show a clear likelihood of success on the merits. The NASL’s claims were anchored in Section 1 of the Sherman Act. Section 1 prohibits “[e]very contract, combination … or conspiracy[ ] in restraint of trade or commerce.”[xxxi] Accordingly, the NASL needed to present evidence of an agreement, scheme or conspiracy by and between USSF and its member bodies to suppress the NASL. In its complaint, the NASL claimed that there are “contracts, combinations and conspiracies led by USSF and its independent members, including MLS and USL, to apply its anticompetitive Professional League Standards to … protect the MLS monopoly.”[xxxii] In other words, the enactment and application of USSF’s divisional standards, according to NASL, supposedly reflect an ongoing conspiracy between USSF and MLS to exclude NASL from Division I.

According to the district court, however, the NASL could only offer circumstantial evidence in support of its alleged concerted action.[xxxiii] Specifically the district court concluded that the USSF’s promulgation of divisional standards was not direct evidence of concerted action among the USSF, the leagues, and SUM.[xxxiv] In its analysis, the district court acknowledged that the broadcast and sponsorship agreement between SUM and the USSF[xxxv] posed “a conflict of interest.”[xxxvi] It also described as “troubling” the USSF’s admitted past intent to give MLS a head start in the industry.[xxxvii] The court nevertheless concluded that there was insufficient evidence of concerted action because the evidence did not tend to exclude the possibility that the USSF was acting independently in adopting, amending and applying its divisional standards.[xxxviii] Accordingly, the district court held, and the Second Circuit affirmed, that the circumstantial evidence presented by the NASL did not rise to the “clear likelihood of success” level necessary to obtain a mandatory preliminary injunction.[xxxix]

The district court further held that, even had the NASL demonstrated concerted action as required by Section 1 of the Sherman Act, the league still failed to prove an unreasonable restraint of trade under the rule of reason analysis.[xl] In its ruling, the district court applied a three-step rule of reason analysis.

Under the first step of the rule of reason, a plaintiff must demonstrate that the alleged restraint has an adverse effect on competition. Here, the NASL argued that there are significant differences between being classified as a Division I, II or III league – namely, financial benefits such as higher-value sponsorship opportunities and more potential for association with the U.S. national team.[xli] The court agreed and further concluded that the USSF had the power to exclude competition through the enactment and application of its divisional standards.[xlii] By ratcheting up its divisional requirements over the last two decades, the court held, the USSF imposed increasingly significant barriers to entry in the market for professional soccer in the U.S. and Canada.[xliii] Accordingly, the district court determined that the NASL had sufficiently established an adverse effect on competition in “the market for (1) top-tier and (2) second-tier men’s professional soccer leagues located in the United States and Canada.”[xliv]

With the NASL having established an anticompetitive effect in the market, the burden shifted to the USSF to offer evidence of procompetitive justifications relating to the restraint.[xlv] Where restraints are necessary for a product to exist, courts have typically permitted such restrictions where they serve a net procompetitive function – particularly in the context of sports.[xlvi] Accordingly, the district court found that most, if not all, of the USSF’s imposed divisional standards had a procompetitive benefit.[xlvii] For example, the USSF’s minimum-team requirement increased output through sustained fan interest and provided stability because larger leagues are less likely to collapse.[xlviii] By way of another example, the district court found that the time-zone and market-size requirements generate fan and media interest, and, along with the stadiumcapacity requirement, promote domestic league quality.[xlix] The court lastly determined that the financial-viability requirements keep fans interested, stabilize the leagues financially, and prevent free riding. Thus, the court held that USSF offered sufficient evidence of the divisional standards procompetitive virtues. [l]

As a result of the court’s finding of procompetitive benefits, the burden shifted back to the NASL to prove that “any legitimate competitive benefits offered by [the USSF] could have been achieved through less restrictive means.”[li] As part of its argument, the NASL pointed to earlier renditions of the USSF’s divisional standards as less restrictive alternatives to the current version of the standards.[lii] The league, for example, questioned the necessity of requiring twelve teams for Division II when eight was sufficient for Division I and II for a number of years.[liii]

Yet, as the Second Circuit explained, the NASL failed to show how reverting to earlier versions of the divisional standards would achieve the same legitimate procompetitive objectives as the standards’ current form.[liv] Rather, reasoned the court, the evolution of the divisional standards could show simply that earlier renditions were no longer viable.[lv] Growing industries have developing standards; antitrust plaintiffs cannot just point to earlier standards as less restrictive alternatives without additionally showing the equivalent viability of the alternatives proffered.[lvi] As such, the court held that the NASL failed to demonstrate viable less restrictive alternatives to the current standards.[lvii] The district court therefore denied the NASL’s request for preliminary injunction because the league failed to show a clear likelihood of success on the merits – a decision which was affirmed by the Second Circuit.[lviii]

Conclusion

Many global leagues exist in areas of the world that have historically supported soccer. Professional soccer in the United States, however, has been fraught with volatility and upheaval. The failure of the initial incarnation of the NASL in the 1970s and ‘80s is a testament to the tenuous footing on which domestic soccer has historically stood. It is therefore unsurprising that the USSF has stood resolute in asserting that its divisional standards are essential to ensuring that American soccer fans continue to receive a reliable, quality product.

Moreover, the NASL has been a mess almost ever since it was resuscitated in 2011. Out of the NASL’s last five expansion teams, four have struggled mightily, changed owners, or gone out of business entirely.[lix] Numerous NASL teams have defected to the USL,[lx] and just days after the Second Circuit’s ruling, the league announced the cancellation of its 2018 season.[lxi]

Nevertheless the league has indicated it intends to see its lawsuit – which was remanded back to the district court for further proceedings – through to the end.[lxii] Despite ruling in favor of the USSF on the NASL’s motion for preliminary injunction, the court could still grant the NASL a permanent injunction, particularly following discovery on the issues at hand, whereby the USSF’s divisional structure could be eliminated. If the court establishes that the USSF has no legal authority to designate divisions, there is nothing stopping some other, better-organized group from creating a real challenge to MLS. Although extremely unlikely, it’s even possible that potential holdings in the case could have an impact on the closed-system model of other sports leagues in America. As such, while its recent court failures could signal the end of the NASL, the potential consequences of its action remain far-reaching.

[i] Justin Fielkow is an attorney at the Franklin Law Group in Northfield, Illinois. He has experience in a variety of business and commercial civil litigation matters, in both state and federal court. Justin also represents businesses in the sports and entertainment fields, by consulting for and providing an array of legal services to sports-related organizations and individuals.

[ii] USSoccer.com, U.S. Soccer Reaching New Heights, https://www.ussoccer.com/ about/about-us-soccer (last visited Mar. 8, 2018).

[iii] See, generally, North American Soccer League, LLC v. United States Soccer Federation, Inc., ECF No. 17-cv-05495-MKB-ST, Doc. 3-39, United States Soccer Federation Professional League Standards (E.D.N.Y. Sept. 20, 2017) (hereinafter, “2014 Standards”).

[iv] MLSSoccer.com, About Major League Soccer, https://www.mlssoccer.com/ post/2017/01/01/about-major-league-soccer (last visited Mar. 8, 2018).

[v] USLSoccer.com, About, https://www.uslsoccer.com/about (last visited Mar. 8, 2018).

[vi] Clive Gammon, The NASL: It’s Alive But On Death Row, Sports Illustrated, May 7, 1984, https://www.si.com/vault/1984/05/07/626590/the-nasl-its-alivebut-on-death-row.

[vii] J.D. Reed, It’s Time For Trimming Sails In The NASL, Dec. 1, 1980, Sports Illustrated, https://www.si.com/vault/1980/12/01/825203/its-time-for-trimming-sails-in-thenasl-three-franchises-are-on-the-verge-of-going-under-as-the-league-grappleswith-the-effects-of-overexpansion-the-recession-and-union-troubles.

[viii] Id.

[ix] Tyler A. Coppage, Taking the Training Wheels Off MLS: Why the Single Entity Antitrust Exemption Should No Longer Apply, 25 Marq. Sports L. Rev. 545 (2015).

[x] Id.

[xi] A promotion and relegation system is one in which teams are transferred between multiple divisions based on their performances in the most recently completed season. The best-ranked team(s) in the lower division are promoted to the higher division for the next season, and the worst-ranked team(s) in the higher division are relegated to the lower division for the next season. This is the structure used by many soccer associations throughout the world, perhaps most prominently, in England. See, generally, Why is there no promotion and relegation in the United States?, Nov. 23, 2016, The Economist, https://www.economist.com/blogs/gametheory/2016/11/football-pyramid-america.

[xii] North American Soccer League, LLC v. United States Soccer Federation, Inc., ECF No. 17-cv-05495-MKB-ST, Doc. 1, Complaint (E.D.N.Y. Sept. 19, 2017) (hereinafter, “Complaint”); USLSoccer.com, supra note 7.

[xiii] Id.

[xiv] Kara Scannell, League cries foul at US Soccer Federation’s new rules, Aug. 31, 2015, Financial Times, https://www.ft.com/content/6ef8ed4e-5002-11e5-8642-453585f2cfcd.

[xv] See 2014 Standards, supra note 4.

[xvi] NASL.com, Standings, http://www.nasl.com/standings (last visited Mar. 8, 2018).

[xvii] See Complaint, supra note 20.

[xviii] Id.

[xix] Id.

[xx] Id.

[xxi] Id.

[xxii] Id.

[xxiii] New York ex rel. Schneiderman v. Actavis PLC, 787 F.3d 638, 650 (2d Cir. 2015).

[xxiv] North American Soccer League, LLC v. United States Soccer Federation, Inc., 2017 WL 5125771, at *8 (E.D.N.Y. Nov. 4, 2017).

[xxv] Id. at *21.

[xxvi] Id.; see also North American Soccer League, LLC v. United States Soccer Federation, Inc., 2018 WL 1021223 (2d Cir. Feb. 23, 2018).

[xxvii] North American Soccer League, LLC, 2018 WL 1021223, at *2; Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981).

[xxviii] Id.

[xxix] Id. at *3.

[xxx] Id.

[xxxi] 31 15 U.S.C. § 1; Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 189 (2010).

[xxxii] Complaint, supra note 4.

[xxxiii] North American Soccer League, LLC, 2017 WL 5125771, at *11.

[xxxiv] Id.

[xxxv] In an effort to sell soccer in the United States, MLS’s marketing and media rights have also been bundled with those of the US National Team, which has helped to expand the MLS footprint and further increasing the value of the sole Division I league. See Grant Wahl, Soccer United Marketing Fact/Fiction: Garber Opens Up on SUM’s Role in U.S. Soccer, MLS, Jan. 25. 2018, SI.com, https://www.si.com/soccer/2018/01/25/sum-soccer-united-marketing-garber-gulati-carter.

[xxxvi] North American Soccer League, LLC, 2017 WL 5125771, at *11.

[xxxvii] Id. at *13.

[xxxviii] Id. at *15.

[xxxix] Id.; North American Soccer League, LLC, 2018 WL 1021223, at *6.

[xl] Id.

[xli] See Complaint, supra note 4.

[xlii] North American Soccer League, LLC, 2017 WL 5125771, at *18.

[xliii] Id.

[xliv] Id.

[xlv] Id.

[xlvi] See, e.g., National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984); see also Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979).

[xlvii] North American Soccer League, LLC, 2017 WL 5125771, at *18-19.

[xlviii] Id. at *19.

[xlix] Id.

[l] Id.

[li] Id.

[lii] Id. at *20.

[liii] Id.

[liv] North American Soccer League, LLC, 2018 WL 1021223, at *9.

[lv] Id.

[lvi] Id.

[lvii] Id.

[lviii] Id.; North American Soccer League, LLC, 2017 WL 5125771, at *21.

[lix] See, e.g., Ron Leuty, In one season, S.F. Deltas won a soccer championship — and now they’re done, Nov. 24, 2017, San Francisco Business Times, https://www.bizjournals.com/sanfrancisco/news/2017/11/24/nasl-san-francisco-deltasbrian-andres-helmick.html.

[lx] NASL cancels complete 2018 season after court ruling, Feb. 27, 2018, ESPN.com, http://www.espn.com/soccer/north-american-soccer-league/story/3400079/ nasl-cancels-complete-2018-season-after-court-ruling.

[lxi] Id.

[lxii] NASL.com, North American Soccer League Announces Cancellation of 2018 Season, http://www.nasl.com/news/2018/02/27/north-american-soccer-leagueannounces-cancellation-of-2018-season (“The focus of the antitrust suit now shifts to securing the long-term advancement of soccer in this country, not only for the NASL, but for all soccer fans, clubs, and communities impacted by the USSF’s restrictions on competition.”) (last visited Mar. 8, 2018).

©2018. Published in the Ass’n: The Newsletter of the Trade, Sports & Professional Associations Committee, Spring 2018, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
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