Before McGOWAN, MacKINNON and WILKEY, Circuit Judges.
UNITED STATES COURT OF APPEALS, DISTRICT OF COLUMBIA CIRCUIT
FOOTBALL, INC., a Maryland Corporation,
a/k/a WASHINGTON REDSKINS and the
NATIONAL FOOTBALL LEAGUE 1978.CDC.192
Date Decided: 9 November 1978; As Amended November 22, 1978. As Amended January 31, 1979.
Rehearing Denied February 1, 1979.
Appeals from the United States District Court for the District of Columbia (D.C. Civil 1643-70).
Opinion for the Court filed by WILKEY, Circuit Judge.
Opinion filed by MacKINNON, Circuit Judge, concurring in part and dissenting in part.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WILKEY
This private antitrust action challenges the legality of the National Football League player selection system, commonly called the "draft." The plaintiff is James McCoy (Yazoo) Smith, a former professional football player who played one season for the Washington Redskins after being drafted by them in 1968. The defendants are Pro-Football, Inc., which operates the Redskins, and the NFL. Smith contends that the draft as it existed in 1968 was an unreasonable restraint of trade in violation of §§ 1 and 3 of the Sherman Act, *fn1 and that, but for the draft, he would have negotiated a far more lucrative contract when he signed as a player in that year. Smith alleges that he has been injured in his business or property *fn2 in the amount of the difference between the compensation he actually received and the compensation he would have received had there existed a "free market" for his services.
After a trial to the court, District Judge Bryant held that the NFL draft as it existed in 1968 constituted a "group boycott" and was thus a Per se violation of the Sherman Act. *fn3 Alternatively, he held that the draft, tested under the rule of reason, was an unreasonable restraint because it was "significantly more restrictive than necessary" to accomplish whatever legitimate goals the NFL had. *fn4 Judge Bryant awarded Smith treble damages totaling $276,000. The Redskins and the NFL have appealed the finding of antitrust liability; both sides have appealed the damage award. Relying on the rule of reason, we affirm the finding of antitrust liability and remand for recomputation of damages. I. BACKGROUND
The NFL draft, which has been in effect since 1935, is a procedure under which negotiating rights to graduating college football players are allocated each year among the NFL clubs in inverse order of the clubs' standing. Under the draft procedures generally followed, the team with the poorest playing-field record during the preceding season has the first opportunity, as among the NFL teams, to select a college player of its choice; the team with the next poorest record has the next choice, and so on until the team with the best record (the winner of the previous year's "Super Bowl") has picked last. At this point, the first "round" of the draft is completed. In 1968 there were 16 succeeding rounds in the yearly draft, the same order of selection being followed in each round. Teams had one choice per round unless they had traded their choice in that round to another team (a fairly common practice). When Smith was selected by the Redskins there were 26 teams choosing in the draft.
The NFL draft, like similar procedures in other professional sports, is designed to promote "competitive balance." By dispersing newly arriving player talent equally among all NFL teams, with preferences to the weaker clubs, the draft aims to produce teams that are as evenly-matched on the playing field as possible. Evenly-matched teams make for closer games, tighter pennant races, and better player morale, thus maximizing fan interest, broadcast revenues, and overall health of the sport.
The draft is effectuated through the NFL's "no-tampering" rule. *fn5 Under this rule as it existed in 1968, no team was permitted to negotiate prior to the draft with any player eligible to be drafted, and no team could negotiate with (or sign) any player selected by another team in the draft. The net result of these restrictions was that the right to negotiate with any given player was exclusively held by one team at any given time. If a college player could not reach a satisfactory agreement with the team holding the rights to his services he could not play in the NFL. *fn6
Plaintiff Smith became subject to the draft when he graduated as an All-American football player from the University of Oregon in 1968. The Redskins, choosing twelfth, picked Smith as their first-round draft choice. After several months of negotiations, in which he was represented by an agent, Smith and the Redskins signed a one-year contract a version of the Standard Player Contract that the NFL requires all players to sign. *fn7 The contract awarded Smith a $23,000 "bonus" for signing, an additional $5,000 if he made the team, and a salary of $22,000, for a total first-year compensation of $50,000.
Smith made the team and performed at a high level of play as a defensive back until he suffered a serious neck injury in the final game of the 1968 season. His doctors advised him not to continue his football career. After his injury the Redskins paid Smith an additional $19,800, representing the amount he would ordinarily have received had he played out the second ("option") year of his contract. *fn8
Two years after his injury Smith filed suit in the District Court. After finding that the draft violated the antitrust laws, Judge Bryant awarded Smith damages equal to the difference between his actual compensation and the compensation he could have received in a free market. To compute the latter amount, Judge Bryant assumed that plaintiff in a free market would have been able to negotiate a three-year contract with an "injury protection clause," I. e., a clause guaranteeing payment for the full term of a player's contract even if he should be incapacitated. Judge Bryant estimated Smith's annual "free market salary" by taking the annual salary ($54,000) of another defensive back (Pat Fischer) who signed as a "free agent" *fn9 with the Redskins in 1968. The resulting calculation yielded $162,000 as the contractual value of Smith's services in a free market. From this sum Judge Bryant subtracted the $69,800 that Smith in fact received, netting actual damages in the amount of $92,200. This figure was trebled to $276,600 in accordance with the antitrust laws. *fn10 II. ANALYSIS
The legality of the NFL player draft under the antitrust laws *fn11 is essentially a question of first impression. *fn12 This case requires us to consider (1) whether the legality of the draft is governed by a Per se rule or by the rule of reason; (2) whether the draft, if tested by the rule of reason, is a reasonable restraint; and (3) whether, if the draft violates the antitrust laws, the measure of damages adopted by the District Judge was proper. We discuss these issues in turn.
The traditional framework of analysis under § 1 of the Sherman Act is familiar and does not require extended discussion. Section 1 prohibits "(e) very contract, combination . . . or conspiracy, in restraint of trade or commerce." While this language is broad enough to render illegal nearly all commercial understandings, the Supreme Court in Standard Oil *fn13 established a judicial gloss on the statute which made the "rule of reason" the prevailing mode of analysis. Under this rule, the fact-finder weighs all the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an Unreasonable restraint on competition. The inquiry mandated by the rule of reason, however, is often laborious, and as the courts gained experience with antitrust problems they identified certain types of agreements which were so consistently unreasonable that they could be deemed illegal Per se, without elaborate inquiry into their purported justifications. Among the practices that have been deemed so pernicious as to be unreasonable Per se are certain "group boycotts." *fn14
Plaintiff argues that the NFL draft constitutes a "group boycott" because the NFL clubs concertedly refuse to deal with any player before he has been drafted or after he has been drafted by another team, and that the draft is in consequence a Per se violation of § 1. The District Court accepted this argument. We reject it. We hold that the NFL player draft is not properly characterized as a "group boycott" at least not the type of boycott that traditionally has been held illegal Per se and that the draft, regardless of how it is characterized, should more appropriately be tested under the rule of reason.
The classic "group boycott" is a concerted attempt by a group of competitors at one level to protect themselves from competition from non-group members who seek to compete at that level. *fn15 Typically, the boycotting group combines to deprive would-be competitors of a trade relationship which they need in order to enter (or survive in) the level wherein the group operates. The group may accomplish its exclusionary purpose by inducing suppliers not to sell to potential competitors, by inducing customers not to buy from them, or, in some cases, by refusing to deal with would-be competitors themselves. *fn16 In each instance, however, the hallmark of the "group boycott" is the effort of competitors to "barricade themselves from competition at their own level." *fn17 It is this purpose to exclude competition that has characterized the Supreme Court's decisions invoking the group boycott Per se rule. *fn18
The NFL player draft differs from the classic group boycott in two significant respects. First, the NFL clubs which have "combined" to implement the draft are not Competitors in any economic sense. The clubs operate basically as a joint venture *fn19 in producing an entertainment product football games and telecasts. No NFL club can produce this product without agreements and joint action with every other team. To this end, the League not only determines franchise locations, playing schedules, and broadcast terms, but also ensures that the clubs receive equal shares of telecast and ticket revenues. These economic joint venturers "compete" on the playing field, to be sure, but here as well cooperation is essential if the entertainment product is to attain a high quality: only if the teams are "competitively balanced" will spectator interest be maintained at a high pitch. No NFL team, in short, is interested in driving another team out of business, whether in the counting-house or on the football field, for if the League fails, no one team can survive.
The draft differs from the classic group boycott, secondly, in that the NFL clubs have not combined To exclude competitors or potential competitors from their level of the market. *fn20 Smith was never seeking to "compete" with the NFL clubs, and their refusal to deal with him has resulted in no decrease in the competition for providing football entertainment to the public. The draft, indeed, is designed not to insulate the NFL from competition, but to improve the entertainment product by enhancing its teams' competitive equality. *fn21
In view of these differences, we conclude that the NFL player draft cannot properly be described as a group boycott at least not the type of group boycott that traditionally has elicited invocation of a Per se rule. *fn22 The "group boycott" designation, we believe, is properly restricted to concerted attempts by competitors to exclude horizontal competitors; it should not be applied, and has never been applied by the Supreme Court, to concerted refusals that are not designed to drive out competitors but to achieve some other goal. *fn23
We are guided in reaching this conclusion by decisions in analogous areas of antitrust law. The courts have consistently refused to invoke the boycott Per se rule where, given the peculiar characteristics of an industry, the need for cooperation among participants necessitated some type of concerted refusal to deal, *fn24 or where the concerted activity manifested no purpose to exclude and in fact worked no exclusion of competitors. *fn25 In view of the joint-venture characteristics of the professional football industry and the purpose of the concerted activity here, these decisions support our conclusion that the NFL player draft is not a group boycott which is illegal Per se.
Whether the draft is a group boycott, or not, we think it is clearly not the type of restraint to which a Per se rule is meant to apply. A Per se rule is a judicial shortcut; it represents the considered judgment of courts, after considerable experience with a particular type of restraint, that the rule of reason the normal mode of analysis can be dispensed with. As the Supreme Court explained in Northern Pacific Railway Co. v. United States, *fn26 "there are certain agreements or practices which because of their Pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use." A court will not indulge in this conclusive presumption lightly. Invocation of a Per se rule always risks sweeping reasonable, pro-competitive activity within a general condemnation, and a court will run this risk only when it can say, on the strength of unambiguous experience, *fn27 that the challenged action is a "naked restraintof trade with no purpose except stifling of competition." *fn28
The Supreme Court emphasized the "demanding standards" of Northern Pacific Railway last Term in Continental T. V., Inc. v. GTE Sylvania Inc. *fn29 Reiterating that "(p)er se rules of illegality are appropriate only when they relate to conduct that is Manifestly anti-competitive," *fn30 the Court overruled Arnold, Schwinn & Co. *fn31 which had held certain vertical restraints illegal Per se. The Continental Court noted that the vertical restrictions in question possessed "redeeming virtues" in their stimulation of inter-brand competition; that the restrictions were "widely used in our free market economy"; and that there existed "substantial scholarly and judicial authority supporting their economic utility." *fn32 For these reasons, the Court held that the restraints at issue were to be analyzed not under a Per se rule, but under the rule of reason.
For similar reasons we reach the same conclusion here. The NFL player draft, we think, quite clearly fails to satisfy the "demanding standards" of Northern Pacific Railway. Given that the draft's restrictive effect is temporally limited, we would hesitate to describe its impact on the market for players' services as "pernicious." More importantly, we cannot say that the draft has "no purpose except stifling of competition" or that it is without "any redeeming virtue." Some form of player selection system may serve to regulate and thereby promote competition in what would otherwise be a chaotic bidding market for the services of college players. The Redskins, moreover, presented considerable evidence at trial that the draft was designed to preserve, and that it made some contribution to preserving, playing-field equality among the NFL-teams with various attendant benefits. The draft, finally, like the vertical restraints challenged in Continental T.V., is "widely used" in our economy *fn33 and has both judicial *fn34 and scholarly *fn35 support for its economic usefulness.
This is not to say, of course, that the draft in any one of its incarnations may not violate the antitrust laws. It is only to say that the courts have had too little experience with this type of restraint, and know too little of the "economic and business stuff" from which it issues, *fn36 confidently to declare it illegal without undertaking the analysis enjoined by the rule of reason.
Our conclusion that the legality of the NFL draft should not be governed by a Per se rule parallels the conclusion of most courts *fn37 and commentators *fn38 that the legality of player restrictions in professional sports should be governed by the rule of reason. In the case most nearly on point, the Eighth Circuit recently declined, for reasons akin to ours, to apply a Per se approach to the NFL's Rozelle rule. *fn39 While we fully appreciate the administrative convenience of a Per se rubric, ease of application alone cannot suffice to recommend it. *fn40 In antitrust law, as elsewhere, we must heed Justice Cardozo's warning to beware "the tyranny of tags and tickets." *fn41 When anticompetitive effects are shown to result from a particular player selection system "they can be adequately policed under the rule of reason." *fn42
Under the rule of reason, a restraint must be evaluated to determine whether it is significantly anticompetitive in purpose or effect. In making this evaluation, a court generally will be required to analyze "the facts peculiar to the business, the history of the restraint, and the reasons why it was imposed." *fn43 If, on analysis, the restraint is found to have legitimate business purposes whose realization serves to promote competition, the "anticompetitive evils" of the challenged practice must be carefully balanced against its "procompetitive virtues" to ascertain whether the former outweigh the latter. *fn44 A restraint is unreasonable if it has the "net effect" of substantially impeding competition. *fn45
After undertaking the analysis mandated by the rule of reason, the District Court concluded that the NFL draft as it existed in 1968 had a severely anticompetitive impact on the market for players' services, and that it went beyond the level of restraint reasonably necessary to accomplish whatever legitimate business purposes might be asserted for it. We have no basis for disturbing the District Court's findings of fact; *fn46 and while our legal analysis differs slightly from that of the trial judge, having benefited from intervening guidance from the Supreme Court, we agree with the District Court's conclusion that the NFL draft as it existed in 1968 constituted an unreasonable restraint of trade.
The draft that has been challenged here is undeniably anticompetitive both in its purpose and in its effect. The defendants have conceded that the draft "restricts competition among the NFL clubs for the services of graduating college players" and, indeed, that the draft "is designed to limit competition" and "to be a "purposive' restraint" on the player-service market. *fn47 The fact that the draft assertedly was designed to promote the teams' playing-field equality rather than to inflate their profit margins may prevent the draft's purpose from being described, in subjective terms, as nefarious. But this fact does not prevent its purpose from being described, in objective terms, as anticompetitive, for suppressing competition, is the Telos, the very essence of the restraint.
The trial judge was likewise correct in finding that the draft was significantly anticompetitive in its Effect. The draft inescapably forces each seller of football services to deal with one, and only one buyer, robbing the seller, as in any monopsonistic market, of any real bargaining power. *fn48 The draft, as the District Court found, "leaves no room whatever for competition among the teams for the services of college players, and utterly strips them of any measure of control over the marketing of their talents." *fn49 The predictable effect of the draft, as the evidence established and as the District Court found, was to lower the salary levels of the best college players. There can be no doubt that the effect of the draft as it existed in 1968 was to "suppress or even destroy competition" *fn50 in the market for players' services.
The justification asserted for the draft is that it has the legitimate business purpose of promoting "competitive balance" and playing-field equality among the teams, producing better entertainment for the public, higher salaries for the players, and increased financial security for the clubs. The NFL has endeavored to summarize this justification by saying that the draft ultimately has a "procompetitive" effect, yet this shorthand entails no small risk of confusion. The draft is "procompetitive," if at all, in a very different sense from that in which it is anticompetitive. The draft is anticompetitive in its effect on the market for players' services, because it virtually eliminates economic competition among buyers for the services of sellers. The draft is allegedly "procompetitive" in its effect on the playing field; but the NFL teams are not economic competitors on the playing field, and the draft, while it may heighten athletic competition and thus improve the entertainment product offered to the public, does not increase competition in the economic sense of encouraging others to enter the market and to offer the product at lower cost. Because the draft's "anticompetitive" and "procompetitive" effects are not comparable, it is impossible to "net them out" in the usual rule-of-reason balancing. The draft's "anticompetitive evils," in other words, cannot be balanced against its "procompetitive virtues," and the draft be upheld if the latter outweigh the former. In strict economic terms, the draft's demonstrated procompetitive effects are nil.
The defendants' justification for the draft reduces in fine to an assertion that competition in the market for entering players' services would not serve the best interests of the public, the clubs, or the players themselves. This is precisely the type of argument that the Supreme Court only recently has declared to be unavailing. In National Society of Professional Engineers v. United States, *fn51 the Court held that a professional society's ban on competitive bidding violated § 1 of the Sherman Act. In so holding the Court rejected a defense that unbridled competitive bidding would lead to deceptively low bids and inferior work "with consequent risk to public safety and health," *fn52 terming this justification "nothing less than a frontal assault on the basic policy of the Sherman Act." *fn53 Ending decades of uncertainty as to the proper scope of inquiry under the rule of reason, the Court stated categorically that the rule, contrary to its name, "does not open the field of antitrust inquiry to any argument in favor of a challenged restraint that may fall within the realm of reason," *fn54 and that the inquiry instead must be "confined to a consideration of (the restraint's) impact on competitive conditions." *fn55 The purpose of antitrust analysis, the Court concluded, "is to form a judgment about the competitive significance of the restraint; it is not to decide whether a policy favoring competition is in the public interest, or in the interest of the members of an industry. Subject to exceptions defined by statute, that policy decision has been made by Congress." *fn56
Confining our inquiry, as we must, to the draft's impact on competitive conditions, we conclude that the draft as it existed in 1968 was an unreasonable restraint of trade. The draft was concededly anticompetitive in purpose. It was severely anticompetitive in effect. It was not shown to have any significant offsetting procompetitive impact in the economic sense. Balancing the draft's anticompetitive evils against its procompetitive virtues, the outcome is plain. The NFL's defenses, premised on the assertion that competition for players' services would harm both the football industry and society, are unavailing; there is nothing of procompetitive virtue to balance, because "the Rule of Reason does not support a defense based on the assumption that competition itself is unreasonable." *fn57
We recognize, on analogy with the Supreme Court's reasoning in Goldfarb *fn58 and Professional Engineers, that professional football "may differ significantly from other business services, and, accordingly (that), the nature of the competition" *fn59 for player talent may vary from an absolute "free market" norm. Given the joint-venture status of the NFL clubs, we do not foreclose the possibility that some type of player selection system might be defended as serving "to regulate and promote . . . competition" in the market for players' services. *fn60 But we are faced here, as the Supreme Court was faced in Professional Engineers, with what amounts to a "total ban" on competition, *fn61 and we agree with the District Court that this level of restraint cannot be justified. The trial judge concluded, with pardonable exaggeration, that the draft system at issue was "absolutely the most restrictive one imaginable." *fn62 Even though the draft was justified primarily by the need to disperse the Best players, it applied to all graduating seniors, including average players who were, in a sense, fungible commodities. It permitted college players to negotiate With only one team. If a player could not contract with that team, He could not play at all.
Without intimating any view as to the legality of the following procedures, we note that there exist significantly less anticompetitive alternatives to the draft system which has been challenged here. The trial judge found that the evidence supported the viability of a player selection system that would permit "more than one team to draft each player, while restricting the number of players any one team might sign." *fn63 A less anticompetitive draft might permit a college player to negotiate with the team of his choice if the team that drafted him failed to make him an acceptable offer. *fn64 The NFL could also conduct a second draft each year for players who were unable to reach agreement with the team that selected them the first time. *fn65 Most obviously, perhaps, the District Court found that the evidence supported the feasibility of a draft that would run for fewer rounds, applying only to the most talented players and enabling their "average" brethren to negotiate in a "free market" *fn66 The least restrictive alternative of all, of course, would be for the NFL to eliminate the draft entirely and employ revenue-sharing to equalize the teams' financial resources a method of preserving "competitive balance" nicely in harmony with the league's self-proclaimed "joint-venture" status. *fn67
We are not required in this case to design a draft that would pass muster under the antitrust laws. We would suggest, however, that under the Supreme Court's decision in Professional Engineers, no draft can be justified merely by showing that it is a relatively less anticompetitive means of attaining sundry benefits for the football industry and society. Rather, a player draft can survive scrutiny under the rule of reason only if it is demonstrated to have positive, economically Procompetitive benefits that offset its anticompetitive effects, or, at the least, if it is demonstrated to accomplish legitimate business purposes and to have a net anticompetitive effect that is Insubstantial. *fn68 Because the NFL draft as it existed in 1968 had severe anticompetitive effects and no demonstrated procompetitive virtues, we hold that it unreasonably restrained trade in violation of § 1 of The Sherman Act.
The trial court found that plaintiff would have negotiated a more remunerative contract but for the draft as it existed in 1968, and estimated his damages (before trebling) at $92,200 the difference between plaintiff's actual compensation and what his "services would have brought in a free market." *fn69 Plaintiff urges that this estimate was too low. He contends principally that it was error to include in the subtrahend the $19,800 he was paid after his injury, since the Redskins allegedly are seeking to offset this sum against his pending workmen's compensation claim. *fn70 Defendants urge that the estimate was too high. They contend that Pat Fischer, an eight-year veteran and twice all-pro, was not comparable to plaintiff, an untried "rookie"; and that the trial court's hypothesis of a three-year "fully guaranteed" contract was speculative, since no Redskins' first-round draft choice and no defensive back in NFL history rookie or veteran had ever negotiated such advantageous terms.
The computation of damages in antitrust cases invariably has a certain Alice-in-Wonderland quality to it. As the Supreme Court has observed, "damage issues in these cases are rarely susceptible of the kind of concrete, detailed proof of injury which is available in other contexts." *fn71 Detailed proof of injury is particularly difficult here: because the draft has existed continuously since 1935, there has never existed (as there usually exists, for example, in price-fixing cases) a "free market" for players' services that might serve as a guide to the prices that would have prevailed absent the antitrust violation. *fn72 In view of such difficulties of ascertainment, the fact-finder is permitted to make "a just and reasonable estimate of the damage based on relevant data," which may include "probable and inferential as well as direct and positive proof." *fn73 "The essential thing is that the available data be used in rational ways which warrant confidence that the damage figure reached is, in fact, a reasonable if imprecise estimate, rather than a speculative guess." *fn74
Making full allowance for the deference that must be accorded the trier of fact, we have concluded after examining the record that his damage calculation must be overturned. Inclusion of the disputed $19,800 in Smith's "actual compensation," we think was clearly proper; *fn75 and the comparison with Pat Fischer, while it produced a hypothetical annual salary ($54,000) well in excess of that paid to any rookie defensive back in NFL history even during the years of the NFL-AFL "bidding war" was not clearly erroneous. *fn76 But there was simply no evidence to support the judge's finding that Smith, absent the draft, would have been able to negotiate a contract containing a guarantee of three years' full salary, regardless of injury. *fn77 No such guarantee had been negotiated by Pat Fischer, the trial court's object of comparison, and no such guarantee had ever been negotiated by any Redskins' first-round draft choice, or by any defensive back at any time in NFL history. The evidence established that multi-year guaranteed contracts expose clubs to great financial risk, and that such guarantees in consequence can generally be negotiated only by veteran players of "Hall of Fame" caliber in key positions. There was, moreover, considerable evidence that Smith, like many rookies, was not even Interested in a multi-year guaranteed contract, preferring more "up-front" money and the right to negotiate new terms on the basis of his first-year performance.
Nor do we think that the district judge was free to ignore all this evidence on the theory that it was irrelevant to what would have happened under "free market conditions." Draft or no draft, Smith's ability to negotiate such lucrative terms would have depended on the Redskins' capacity to afford them. The Redskins, like the other NFL clubs, presumably were charging for tickets and TV rights approximately what the market would bear, yet their operating income was only $260,000 in 1968 and $300,000 in 1969. Sheer economics as well as consistent past practice may thus have prevented the Redskins from assuming, in the case of an untried rookie, the financial risks attending the type of contract Smith proposes.
For these reasons, we conclude that the trial judge's hypothesis of a fully guaranteed, three-year contract can be characterized only as a "speculative guess." There was no evidence on which this hypothesis could be founded, no evidence from which it could be inferred. We accordingly remand this case to the District Court for recomputation of damages.
Affirmed in part, reversed in part, and remanded for proceedings consistent with this opinion.
MacKINNON, Circuit Judge, concurring in part and ...