ANALYSIS: NFL Asks Supreme Court to Bounce Bar’s Cartel Claim

July 24, 2020, 8:43 AM

The National Football League Inc. has filed a petition asking the Supreme Court to overturn a Ninth Circuit ruling that allowed a couple of bar owners to mount an antitrust challenge to the “Sunday Ticket,” the NFL’s exclusive out-of-market television broadcast package.

The Ninth Inning Inc., doing business as The Mucky Duck bar, alleged that the joint venture between the NFL and DirecTV is a restraint of trade that violates the Sherman Act. While each team owns its broadcast rights, Ninth Inning alleges that pooling those rights into the NFL and then exclusively licensing them to DirecTV means the teams don’t compete to market their broadcast rights. Without the exclusive deal, Ninth Inning says, customers would pay less and have more flexibility in what game broadcasts they purchase.

The NFL’s petition, filed by Supreme Court heavy-hitter and former U.S. Solicitor General Paul Clement, poses two legal questions. Most of the briefing focuses on the first, which asks whether the Ninth Circuit’s opinion used the wrong standard in concluding that Ninth Inning’s complaint alleges enough to move ahead to fact discovery. The second question asks whether customers buying television broadcasts from DirecTV have a right to complain about the underlying NFL licensing scheme at all under restrictions on who has standing to bring antitrust claims.

The “rule of reason” standard is a perennial source of complexity, and the Court might be willing to use this case to further clarify when and how deeply district courts must examine plaintiffs’ relevant market allegations. But who can sue for federal antitrust damages is also an important question, and may further make the case one to watch. The Court has expressed some interest in the petition, and it is still pending review by the Court.

From Bricks to Apples

As a general rule, only those who buy directly from a cartel or a monopolist have standing to sue for damages under federal antitrust law—a rule the Supreme Court announced in 1977 in Illinois Brick v. State of Illinois.

The rule began as a way to keep multiple layers of the supply chain from recovering for a single antitrust violation, and thus double-counting damages against the defendant, and to preclude problems with proving which piece of a price increase was passed to which part of a potentially complex supply chain. The bright-line rule provided some clarity about who could bring a damages action.

But almost from the start, the Illinois Brick rule has not eliminated indirect purchasers from bringing antitrust lawsuits. First, “indirect purchasers” who bought a violator’s product or service through a middleman can still bring suits for injunctive relief under the Sherman Act. Second, many states have passed “Illinois Brick repealer” laws that give their residents the right to bring indirect purchaser actions seeking damages under state antitrust laws. Therefore, defendants in federal antitrust cases often face both a group of direct purchasers seeking treble damages under the Sherman Act and a group of indirect purchasers looking for damages under state law and injunctive or declaratory relief under the Sherman Act.

Two changes have further eroded the underlying purpose of Illinois Brick.

First, in a digital economy, it can be very difficult to decide who is really buying from whom. Last year in Apple v. Pepper, the Supreme Court encountered this problem and held that people who purchase an application through Apple’s “app store” are indeed direct purchasers from Apple, even if Apple says it is merely a pass-through and the app developer eventually winds up with the money (and pays any allegedly overpriced commission for listing on the app store). People buying apps, whose credit card statements show a charge from “Apple,” don’t know about the licensing arrangement Apple might have with developers behind the scenes, the court reasoned. Allowing the structure of those online arrangements to determine who could sue could manufacture antitrust indemnity out of invisible transactional complexity. Or, to put it another way: You paid Apple, you bought from Apple.

Second, digital inventory tracking means that it is now entirely feasible to trace a specific product through entire lines of commerce and measure the markup at each stage. In a technological sense, we’re much better able to parse which piece of a supply chain paid which portion of a cartel overcharge than we were in 1977.

Based on these developments, some observers argue that the Illinois Brick rule doesn’t serve its purpose and merely adds to the complexity and cost of antitrust disputes. Others suggest that the rule has continued vitality and should be observed and even strengthened.

The Co-Conspirator Exception

There are several exceptions to the Illinois Brick rule, and the NFL argues that this case involves an unwarranted extension of one of them. Ninth Inning alleges that it bought the “Sunday Ticket” cable bundle from DirecTV, which is involved in the conspiracy to raise broadcast prices with the NFL, and therefore is part of the underlying antitrust violation. If the direct purchaser (here, DirecTV buys the broadcast license) is in on the conspiracy, then the only person entitled to damages under the Sherman Act has no motivation to sue. Accordingly, the “co-conspirator exception” to the Illinois Brick rule allows the next purchaser down the chain from an antitrust violator to bring suit instead.

The NFL contends that the piece of the deal that allegedly raised prices—NFL teams pooling their rights—doesn’t involve DirecTV’s license or bars buying cable television bundles from the League. But the Ninth Circuit held that the complaint alleges that the whole series of transactions is one overarching conspiracy involving DirecTV, and that for purposes of stating a claim, that’s enough of an allegation to move the complaint along to discovery. In its appeal, the NFL argues that, in so doing, the Ninth Circuit extended the co-conspirator exception from cartels about price fixing to a situation involving an output reduction (because DirecTV’s purchase of the NFL exclusive license means there are fewer outlets for football games on television, but DirecTV sets the price for the “Sunday Ticket” and the NFL isn’t involved).

The NFL contends that the Ninth Circuit’s holding exacerbates a split in the circuit courts over whether the ties among the teams, the NFL, and DirecTV are adequate to support the co-conspirator exception. Ninth Inning counters that they are all part of one overarching conspiracy with several parts, and that there is no functional difference between an output restriction and fixing a higher price; they accomplish the same thing, with a restriction often the very mechanism that is employed to raise prices.

Whom Should the Law Protect?

Illinois Brick‘s bright-line rule has been less than crystal clear for a long time. The Supreme Court could try to rejuvenate the rule, or it could scrap it if the reasoning behind it no longer resonates. It’s not clear if this case is a good one for either tack, and the court could grant the NFL’s petition and still avoid addressing the Illinois Brick issue because it isn’t dispositive. In short, while this is one of the few cases potentially before the court on an “antitrust” issue, it likely won’t have much of an impact on the most confounding aspects of antitrust standing that litigants face today.

But more importantly, current antitrust law hasn’t held on to much from the 1970s, and there is genuine discussion in antitrust circles about whether the Illinois Brick rule still makes sense. Each time a petition brings the issue before the Court, one wonders if the appetite for judge-made, bright-line rules that impose limits outside the text of the statute has changed over the intervening 40-plus years. Today, who do we believe should have a right to damages under the Sherman Act? That basic policy question isn’t answered when we tinker around the mortar between the bricks.

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