November 16, 2017

North American Soccer League Misses Shot Seeking Preliminary Injunction, But Appeals the Ruling

By David Scupp

The North American Soccer League (“NASL”) lost an important preliminary match in court last week when the United States District Court for the Eastern District of New York denied the league’s motion for a preliminary injunction that would have ordered the United States Soccer Federation (“USSF”) to designate the NASL as a “Division II” professional soccer league.

NASL has appealed the ruling to the United States Court of Appeals for the Second Circuit, which may rule on the league’s right to preliminary relief by early December.

For years USSF—a non-profit, membership organization—has served as the de facto governing body for soccer in the United States, claiming that it derives its authority from the international governing body FIFA.

USSF adopts, amends, and applies its Professional League Standards (“PLS”), a set of requirements for professional soccer leagues seeking Division I, II, or III designation in the United States.  The PLS include requirements related to the number of teams in a league, the geographic dispersion of teams, and certain financial obligations.  Division I status is the highest and most desirable status, and has been conferred only on Major League Soccer (“MLS”).

Leagues seeking Division status are required to apply annually to the USSF Board, which votes on those applications.  The Board is comprised of a cross-section of soccer interests in the United States, including representatives of athletes, amateurs, and professionals.  The professional leagues officially have two votes on the Board, and, given the voting structure of the professional council, MLS has the voting power to control who represents the professional council on the USSF Board.

Since 2010 and until recently, NASL has obtained annual Division II status from USSF, despite a failure to comply with all of the PLS Division II requirements (USSF granted NASL certain waivers).  NASL’s ambition, however, has been to achieve Division I status, which would make NASL a rival league to MLS.  In May 2015, NASL for the first time applied for Division I status.  USSF rejected NASL’s Division I application, but approved NASL for Division II status.

In August 2017, however, USSF rejected NASL’s Division II application for the 2018 season, citing NASL’s failure to comply with the PLS in various respects.  NASL filed an antitrust suit against USSF and sought a preliminary injunction requiring USSF to designate NASL as a Division II league for the duration of the litigation.

The court denied NASL’s motion.  As a threshold matter, the court found that NASL was required to meet a heightened standard to prevail because NASL sought a “mandatory” injunction.  A mandatory injunction is one that alters, rather than maintains, the status quo.  To satisfy the heightened standard applicable to mandatory injunctions, a movant is required to prove that it would suffer irreparable harm absent an injunction, and to make a “clear showing” that it is entitled to the relief requested, or that “extreme or very serious damage” would result from a denial of the injunction.

The court found that NASL had demonstrated irreparable harm.  USSF designation is essential to a United States professional soccer league’s perceived credibility.  The court acknowledged that NASL’s loss of Division II status could lead to a loss of potential investors and threaten the survival of the league as a whole.  The denial of status, the court held, could “deal a death blow to the NASL.”  The court followed Second Circuit case law holding that a total loss of business constitutes irreparable harm and held that NASL had satisfied that prong of the preliminary injunction standard.

Despite NASL’s showing that it would suffer irreparable harm, the court held that NASL had failed to demonstrate the clear showing of entitlement to relief required to obtain a mandatory injunction.

The first question the court considered regarding NASL’s entitlement to relief was whether NASL had provided evidence of a concerted scheme, under Section 1 of the Sherman Act, among the members of the USSF board.  Given that the USSF is a standard setting organization, it was not enough for NASL to show merely that the USSF Board agreed to the PLS.  Rather, NASL had to demonstrate “an agreement to agree to vote a particular way, compromising each individual Board member’s independence,” in order to show concerted action for purposes of NASL’s Section 1 claim.

To be sure, the court recognized that in some cases “a by-law, rule, regulation or standard is so clearly anticompetitive on its face to warrant a finding of an ‘agreement’ for purposes of Section 1,” but held that this was not one of those cases.  The court rejected NASL’s argument that circumstantial evidence demonstrated inherent conflicts of interest that infected the adoption, application, and amendment of the PLS, and held that NASL had failed to put forth clear evidence of concerted action.

The court then held that, even if NASL had sufficiently demonstrated concerted action, the motion still fell short of demonstrating a clear showing of entitlement to relief under the rule of reason—the balancing test courts apply to most antitrust cases, and almost always in the professional sports context.  The court accepted NASL’s proposed market definition of (1) top-tier and (2) second-tier men’s professional soccer leagues located in the United States and Canada.  The court also held that NASL had demonstrated that USSF had sufficient market power to cause an adverse effect on competition in the relevant market, and that “by enacting and strengthening the PLS, Defendant has, at the very least, created and heightened existing barriers to entry in the market for top-tier and second-tier men’s professional soccer leagues.”

The court held, however, that USSF had satisfied its burden of demonstrating that the PLS have procompetitive effects.  Specifically, the PLS’s requirements concerning the minimum number of teams, the geographic dispersion of teams throughout North American time zones, market size, stadium capacity, and teams’ financial validity, all promote the quality of the league, encourage investment by teams, and reduce incentives for others to free-ride off of those investments.  As NASL had failed to prove that any less-restrictive alternatives to the PLS (e.g., prior iterations of the PLS) would provide the same procompetitive benefits, the court held that NASL had failed to establish a clear showing of entitlement to relief under the rule of reason.

At bottom, the denial of NASL’s preliminary injunction motion is not a surprise.  Preliminary injunctions in antitrust actions are rare outside of merger cases, as are “mandatory” injunctions generally.  Further, in the context of professional sports leagues, there is an inherent need for coordination and cooperation among competitors.  These realities pose high hurdles for an antitrust plaintiff, and ultimately proved to be too difficult for NASL to overcome.

All is not lost for the league, however.  NASL has appealed the ruling, and the court of appeals has agreed to hear the matter on an expedited basis.  A ruling could issue before year’s end.

Edited by Gary J. Malone

Categories: Antitrust Litigation

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