Judge Sotomayor served on the three-judge panel of the U.S. Court of Appeals for the 2nd Circuit, who unanimously overturned the US District Court’s decision in favor of Clarett. In doing so, Sotomayor, writing for the panel, preserved the 2nd Circuit’s convention of rigid application of the non-statutory antitrust exemption in cases involving sports leagues— interpretations that generally favor the league’s position. The Clarett ruling represents a significant extension of the non-statutory exemption, the intent of which is to facilitate the negotiation process by permitting the use of some anticompetitive practices as bargaining chips. Simply put, the exemption theoretically improves net welfare by exchanging a reduction in market efficiency for greater efficiency of negotiation. The draft-eligibility rule, in the absence collective bargaining, is manifestly anticompetitive (see Haywood v. NBA). Moreover, it represents at best a trivial point of negotiation between sports unions and management. In fact, at the time of the ruling, age restrictions had never been explicitly included within a sports collective bargaining agreement. (Subsequently, the NBA and NFL agreements made eligibility restrictions explicit.) There is no welfare gain from this trade. The recognition of employment eligibility restrictions based on age is not consistent with the intent of the non-statutory antitrust exemption and the 2nd Circuit overstepped with their ruling allowing its inclusion.
The legal basis for the 2nd Circuit opinion is murky; arguments, both pro and con, now populate several law reviews. The non-statutory exemption, derived from US Supreme Court decisions, dictates that the conditions negotiated in the collective bargaining process are off limits to antitrust challenges from individuals party to the agreement—labor law trumps antitrust law in cases where the two conflict. In the instance of sports leagues, players represented by the union, and club owners represented by the management negotiating team, forgo individual antitrust protection for the sake of advancing the collective bargaining process. Conventional features negotiated under current sport league collective bargaining agreements, including restrictions on open labor markets such as rookie drafts and salary caps, are typically decreed anticompetitive and proscribed by antitrust law. Yet these restrictions are legal under labor law, and are exactly the issues around which labor negotiations in sports center. The negotiation process is doubtless better facilitated by their removal from antitrust scrutiny.
Nonetheless, the non-statutory exemption provides for antirust review of the provisions of collective bargaining agreements, given particular conditions. Unfortunately, the parameters of these conditions are not well defined by the Supreme Court. The 2nd Circuit, as is clear in the opinion, has limited antitrust scrutiny of collective bargaining agreements to challenges based on product market competition, effectively maintaining that a labor market challenge, such Clarett’s, always falls under the exemption. The 8th Circuit, conversely, developed the three pronged Mackey Test to the exemption for labor market cases, stipulating that the exemption holds only if all three prongs are satisfied.
1. The labor policy favoring collective bargaining may potentially be given pre-eminence over the antitrust laws where the restraint on trade primarily affects only the parties to the collective bargaining relationship.
2. Federal labor policy is implicated sufficiently to prevail only where the agreement sought to be exempted concerns a mandatory subject of collective bargaining.
3. The policy favoring collective bargaining is furthered to the degree necessary to override the antitrust laws only where the agreement sought to be exempted is the product of bona fide arm's-length bargaining.
The District Court applied the Mackey test and found the case met none of the three criteria. The 2nd Circuit appears to dismiss the District Court’s use of the test as inappropriate, out of hand, because Clarett is not a harmed product market competitor. However, apparently for reinforcement, they reviewed each of the three prongs, as applied to the case, and scored it the necessary 0-3 against Clarett.
That at least one of these prongs is not satisfied seems to me quite likely, although persuasive arguments from legal scholars can be found on both sides. For example, The Sports Economist has problems with prong one, and I think this prong best represents the anticompetitive inefficiency. The 2nd Circuit relies on Wood v. NBA here; but can draft eligible rookies, just a motion away from union membership, and those banned from the league, and therefore the union, both be classified as parties to the collective bargaining relationship? Compelling arguments that Clarett meets neither prong two or three are found here.
Notwithstanding, the 2nd Circuit is mistaken in its interpretation that review the non-statutory antitrust exemption is appropriate only in cases brought by product market competitors. This is parallel to an affirmation that the Sherman Act is not applicable to labor markets, an argument long since decided as flawed. The bottom line is that the decision does not just permit, but encourages an anticompetitive practice—note the almost immediate imposition of a eligibility restriction rule by the NBA— and all the accompanying market inefficiency for no apparent gain in bargaining efficiency.