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In pursuit of free agency, players could challenge MLS as single entity

The collective bargaining agreement for Major League Soccer will expire this Saturday, and if MLS and the MLS Players Union fail to reach an agreement on a new CBA by then, there is a real possibility that a players’ strike could derail the 2015 MLS season.

A strike can be averted if a new CBA is reached soon, but MLS and MLSPU remain far apart on a deal. The two sides have wildly different views on key issues, with players’ desire to secure free agency the most significant contention. As explained by SI's Brian Straus, MLS vigorously opposes free agency, even restricted free agency, for fear that players’ salaries would accelerate at a rate faster than the league could absorb.

With CBA talks stalled on free agency issue, MLS players talk strike

MLS is well aware of how free agency dramatically changed the economics of other sports leagues in North America. Once an athlete is able to attract bids from multiple potential employers, he creates a dynamic where competitors bid against each other for his services.

There is no more effective way for a player to raise his salary than to generate competition from potential employing clubs to sign him.

The economic effects of free agency have been especially noticeable in Major League Baseball, where the average salary has increased from $51,500 in 1976 (the first year free agency went into effect) to $3.8 million today. That’s a startling increase of roughly 7,300 percent. Even adjusting for inflation, the increase is still more than 1,600 percent. While other factors have played explanatory roles in the surge of MLB players’ salaries, and while salary caps have blunted the effect of free agency in other leagues, MLS is worried about the league’s sustainability in a world where star players can negotiate with MLS clubs as free agents.

Even if MLS and MLSPU fail to reach an agreement by Saturday, it is unlikely either side would take action until March. The MLS regular season doesn’t begin until March 6, leaving the two sides with all of February to find a common ground. For comparison's sake, the last CBA was agreed upon five days before the start of the 2010 season. MLS and MLSPU could also negotiate a temporary extension of terms found in the current CBA as a way of buying time. These steps, though, would not be lasting solutions. MLS and MLSPU need to strike a deal this spring, or 2015 could become an infamous year for MLS and its players.

But if the single-entity league maintains its stance against free agency, what options, beyond a strike, do the players have? They could challenge the league's status as a single entity and bring an antitrust lawsuit, the fallout of which could extend beyond 2015. Players could argue that the league doesn’t qualify as a “single entity” under antitrust law and thus its rules impacting player compensation are subject to rigorous scrutiny.

Such a lawsuit could take years to play out and threaten to destabilize a league that has thrived in recent years, something that neither side likely wishes to endure.

Backed into a corner, though, the players might not have another route unless the league budges. Here are the legal options and landscape for the players and the league going forward:

MLS could play without a CBA

If no new CBA is reached, MLS could announce that it will play the 2015 season without a labor agreement. In this scenario, MLS would likely maintain existing salary and compensation rules as found in the current CBA.

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In other words, there would be no changes to rules impacting players’ employment. Roster limits of 30 players, formulas for the salary cap and for salary floors and ceilings, salary exceptions for Designated Players and other collectively bargained rules related to players’ earnings and benefits would all continue. MLS players, who on average earn about $140,000 a year, would be expected to honor their employment contracts.

MLS clubs—and fans, sponsors and broadcasters—would thus expect players to play out the 2015 season.

It may sound surprising that MLS could simply continue to use rules found in the current CBA without agreeing on a new one. But a sports league isn’t obligated to use a CBA. MLS, in fact, operated without a CBA from 1994 to 2004, and other prominent sports leagues, including the Ultimate Fighting Championship and NASCAR, are run without a CBA.

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Sports leagues fear Section 1 of the Sherman Antitrust Act

So why use a CBA? The main attraction for a traditional sports league is that a CBA prevents players from filing successful lawsuits against the league under Section 1 of the Sherman Antitrust Act. Section 1 is an area of law that has frustrated U.S. sports leagues for decades. Section 1 applies to leagues when they’re comprised of competing and independently owned clubs.

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Leagues like the NFL and NBA are classic examples of leagues that grapple with Section 1 legal issues.

Section 1 applies to them because NFL teams and NBA teams are fundamentally competitors—they play against each other, they compete for players, etc.—and under Section 1, competing businesses are obligated to compete with each other and avoid anti-competitive collaborations.

For leagues, Section 1 means team owners are barred from conspiring to impose anti-competitive restrictions on player compensation and employment.

The risk of facing Section 1 litigation is real. Over the years, players in U.S. sports leagues have filed various Section 1 lawsuits over restrictions like salary limits, eligibility rules and free agency barriers that owners had collaboratively imposed on players. Some of those lawsuits took years to resolve, as courts had to balance the pro-competitive and anti-competitive implications of the challenged restrictions.

This balancing typically requires substantial amounts of expert testimony from economists. As an illustration, when New York Jets running back Freeman McNeil and seven other players challenged the NFL’s free agency rules during a period when the NFL and NFLPA played without a collective bargaining agreement (1987 to 1992), a federal court weighed the players’ arguments and ultimately found them to be correct. Highlighting how much a players’ lawsuit can change a league’s rules, McNeil v. NFL is a main reason why there is unrestricted free agency in the NFL.  

Sports leagues evade Section 1 through collective bargaining or single-entity structure

A league can avoid Section 1 lawsuits in one of two ways. The classic way is to take advantage of the so-called “non-statutory labor exemption” under federal labor law. This exemption, which applies generally to management and union settings, dictates that when a league and a players’ association collectively bargain a rule that impacts a players’ wages, hours and other working conditions (like drug tests and personal conduct policies), this rule is exempt from Section 1 of the Sherman Act. The non-statutory labor exemption is why leagues collectively bargain, rather than unilaterally impose, rules on players: they escape the prospect of risky and expensive Section 1 lawsuits over those rules.

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The second way for a league to avoid Section 1 lawsuits is to operate as a “single entity.” A single-entity sports league is one where its teams do not compete as independent businesses. Instead, these teams are owned by the league and compete as arms of the league.

Since Section 1 only applies to competing businesses, a single-entity sports league is outside its reach.

In a single-entity sports league, teams are similar to competing products made by the same company. Consider soft drinks. Pepsi and Mountain Dew compete for your dollars in restaurants, supermarkets and vending machines, yet those dollars go to the same company: Pepsi Co., the parent company of both drinks. Section 1 of the Sherman Act wouldn’t prohibit the businesspersons who run Pepsi and Mountain Dew from agreeing on anti-competitive restrictions—like coordinating price changes or not competing in certain stores—even though those restrictions might raise prices and reduce consumer choices.

This is because Section 1 only applies to competitors, and Pepsi Co. obviously can’t compete with itself. If the conspiring soft drink brands were instead Pepsi and Coca-Cola, Section 1 would apply since competing companies produce them.

MLS was formed a single-entity sports league, but a federal appeals court did not fully agree

What do soft drinks have to do with the looming labor crisis in MLS? The relevancy is that MLS was designed to be a single-entity sports league. One of its chief architects, sports attorney Alan Rothenberg, structured MLS with the prevention of Section 1 lawsuits in mind.

At its inception, MLS owned MLS clubs. Investors, including Robert Kraft and Lamar Hunt, purchased equity in MLS itself rather than any team. MLS did almost everything for its clubs. It assigned players to MLS clubs, protected intellectual property rights and negotiated broadcasting deals. On the other hand, “operators-investors” ran individual MLS clubs with some autonomy and their compensation was impacted by team success.

Still, MLS and its clubs by and large acted as one company, with clubs functioning as departments within the same company.

Despite seeming like a single-entity sports league, MLS wasn’t expressly viewed as one by a federal court of appeals. In a case called Iain Fraser et al. v. MLS, a group of players sued MLS arguing that its rules impacting salaries violated Section 1, among other antitrust laws. At the time, MLS played without a CBA, so MLS needed courts to treat it as a single entity in order to escape Section 1 review. While a federal district court agreed that MLS was a single entity, the U.S. Court of Appeals for the First Circuit declined to approve that classification in 2002.

The First Circuit described MLS as “a hybrid arrangement, somewhere between a single company . . . and cooperative arrangement between existing competitors.” The First Circuit placed particular emphasis on the mixed incentives for operator-investors, as their team-interests were not always aligned with their league-interests. MLS ultimately won Fraser v. MLS on other grounds, but its status as a single entity is no longer certain. The U.S. Supreme Court did not review Fraser v. MLS, and thus there is no certainty from the highest court in the land.

Recent developments cast doubt on whether MLS is a single-entity sports league

Since Fraser v. MLS, a few things have happened that lend even more uncertainty as to whether MLS is a single entity.

First, as MLS has become more popular in the U.S., clubs have become competitive with each other and seemingly more autonomous. This is particularly true when studying the Designated Player Rule, brought into existence when the league signed David Beckham in 2007. This rule enables MLS clubs to spend far above the salary cap in order to secure the services of a superstar player who would otherwise play in a more lucrative league.

Club operator-investors, rather than MLS, pay most of the salaries of Designated Players. This salary arrangement suggests that MLS clubs are to some degree independent of MLS, with individualized incentives, and thus function more akin to teams in a traditional sports league. MLS clubs are also acting independently through the construction of soccer stadiums. For years, MLS clubs would use NFL teams’ stadiums, but recently have financed new stadiums. MLS clubs mostly do their own stadium deals. This advances an argument MLS clubs are autonomous from each other and not acting like departments in the same company.

Second, the U.S. Supreme Court’s ruling in American Needle v. NFL in 2011 made it more difficult for a sports league to be recognized as a single entity. I wrote an in-depth article on the American Needle case in the Yale Law Journal, and the case centered on whether the NFL and its teams are a single entity when they enter into licensing contracts. The Supreme Court, in a 9 – 0 decision (a rarity given that the justices embrace very different ideological views) held that the NFL and its teams are not a single entity on economic decisions, because teams are individually owned and compete in a variety of ways. While MLS is clearly more centralized than the NFL, American Needle v. NFL is not an encouraging precedent for MLS.

Risk of going on strike

MLS players have a right to go on strike under U.S. labor law, but the decision to do so would carry risk. If MLS players go on strike, they would forgo their salary and benefits. The same may be true for their family members. It is possible the MLSPU, like players associations in other leagues, has a “strike fund” to help out players financially during a labor crisis, but such a fund usually only pays a fraction of salary and benefits.

Players who support striking might reason they can sign with clubs in other leagues, but that would be a risky move. Signing with a club in another league while striking against MLS would likely constitute a breach of their MLS contract and it could also be barred by FIFA. MLS could also file an unfair labor practices charge against the MLSPU in the event of a strike.

Going on strike could also damage MLS in a way that means lower salaries for future MLS players. If a strike leads to an exodus of star talent from MLS, there would be less interest from fans, sponsors, broadcasters and media in MLS. This would mean less revenue for MLS and likely lower salaries for MLS players.

How an antitrust lawsuit would work and MLS defenses

In addition to striking after the CBA expires, MLS players could file a Section 1 antitrust lawsuit against MLS, its clubs and club owners. Before filing a lawsuit, players would need to decertify the MLSPU. Decertification is a phrase that received considerable attention in 2011 during the NFL and NBA labor crises. It refers to the decision of union members to revoke the capacity of their union to collectively bargain on members’ behalf. In the absence of a collective bargaining relationship with a league, an antitrust lawsuit by players is generally permissible (although in that scenario, the league tells the judge that decertification is a farce designed to enable an antitrust lawsuit).

MLS players’ lawsuit would contend that MLS rules on salaries, contracts, eligibility etc.—pretty much everything—violate Section 1 and other antitrust laws.

They would argue MLS is not a single entity and thus MLS rules are subject to Section 1 review. The players would demand monetary damages, which under the Sherman Act can be “trebled” (multiplied by three).

The players would likely also seek injunctive relief, and specifically ask a judge to enjoin MLS from using its rules until a new CBA is reached.

As an important caveat, the mere fact that MLS could face review under Section 1 does not mean MLS would be found to violate Section 1. MLS could assert, with some persuasion, that its rules promote economic competition, particularly in the ultra competitive global market for soccer players and in a U.S. market with limited interest in the sport. MLS might be able to prove that in the absence of rules that bar free agency and other rights sought by players, MLS would collapse. MLS would have a solid chance of prevailing.

The problem for MLS is that it doesn’t want to face a players’ strike and it doesn’t want to face an antitrust lawsuit.  Even “winning” those fights would be costly, controversial and damaging to the future of this league. MLS players are aware of that, and that gives the players leverage. Whether the two sides can avoid this Labor Armageddon and mutually assured destruction is ultimately up to them.

Michael McCann is a legal analyst and writer for Sports Illustrated. He is also a Massachusetts attorney, the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law and the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.