Friday, December 17, 2010

More on the Legality of the BCS: The Consumer Welfare Issue

Following up on last week's discussion regarding the legality of the BCS under antitrust law, there is one additional defense that can be asserted by the BCS that warrants some consideration. Specifically, in recent weeks BCS Executive Director Bill Hancock has argued that the BCS does not violate antitrust law because it does not harm consumers. In other words, the BCS alleges that it, at most, results in the six major BCS Conferences harming their rivals (i.e., the non-automatically qualifying, so-called non-BCS Conferences), but does not diminish competition overall. As a result, because consumers have not themselves been harmed, the BCS argues that it does not violate federal antitrust law.

This defense draws on a line of antitrust precedent dating back to the Supreme Court's 1962 decision in Brown Shoe Co. v. United States, in which the Court famously stated "it is competition, not competitors, which the [Sherman] Act protects." Following Brown Shoe, courts have increasingly required antitrust plaintiffs to establish that a challenged restraint harm consumers, rather than simply hurt a competing firm in the larger competitive marketplace.

This consumer welfare argument is probably the BCS's strongest defense in response to a group boycott claim focusing on harm to the non-BCS Conferences. While the BCS's ultimate chances of success on this argument are uncertain, the defense is not as foolproof as the BCS would have people believe. Indeed, as I discuss in my forthcoming article "Antitrust & The Bowl Championship Series," there are several significant counter-arguments that can be asserted against the BCS on the consumer welfare issue.

As an initial matter, the Supreme Court has never considered whether a showing of harm to consumer welfare is necessary in a group boycott claim. While the Court could of course ultimately hold that consumer welfare must be implicated in group boycott cases, that outcome is not necessarily certain, given that a classic group boycott claim is - at its root - premised on harm to a competing firm.

More significantly, though, a plaintiff challenging the BCS under antitrust law can point to analogous case precedent to argue that the BCS does in fact harm consumers in a way that is cognizable under antitrust law. Specifically, in the 2004 case of Metropolitan Intercollegiate Basketball Ass'n v. National Collegiate Athletic Ass'n, 339 F.Supp.2d 545 (S.D.N.Y. 2004), the promoters of college basketball's National Invitational Tournament (NIT) sued the NCAA, alleging that an NCAA rule requiring that all teams selected for the NCAA's post-season college basketball tournament exclusively play in that tournament unfairly harmed the competing NIT, preventing the NIT from assembling the best possible field of teams for its own tournament. In response, the NCAA -- like the BCS -- argued that its regulation did not harm consumers, but instead at most only harmed a competitor to the NCAA, and therefore did not violate antitrust law. The Southern District of New York rejected this argument, finding that it could not distinguish harm to the competing NIT from harm to competition itself. Specifically, the court held that because the NCAA's rule prevented the NIT from offering consumers the most competitive basketball possible, consumer welfare had been sufficiently implicated to allow the NIT to proceed with its antitrust case.

A plaintiff challenging the BCS can rely on this precedent to argue that the BCS similarly implicates consumer welfare. For example, this year both Virginia Tech and UConn received automatic bids to BCS bowl games by virtue of winning the ACC and Big East, respectively. Those invitations came at the expense of higher-ranked teams left out of BCS bowl games, such as tenth-ranked Boise State, who was relegated to the MAACO Bowl Las Vegas. As a result, one could argue that football fans have been harmed by not being able to watch the most competitive BCS games possible, such as one featuring Boise State against ninth-ranked Michigan State, another highly regarded team left without a BCS bid. Similarly, a plaintiff could also argue that the BCS harms consumer welfare when it distributes a disproportionately lower share of revenue to participating non-BCS Conference schools, insofar as these financial discrepancies help foster competitive disparities throughout college athletics. In other words, because the six BCS Conferences receive twice as much revenue for their participation in a BCS bowl game as does a participating, non-BCS Conference, the BCS schools are able to use this revenue advantage to field stronger teams not only on the gridiron, but across a number of different sports. As a result, consumers are thus deprived of the most competitive college athletics events possible at the non-BCS Conference level.

Third, a plaintiff could also point to recent surveys showing that anywhere from 63 percent to 90 percent of college football fans have an unfavorable opinion of the BCS as further evidence that the BCS generally harms consumer welfare.

Finally, the consumer welfare defense likely would not protect the BCS from a potential price fixing claim, which could be alleged insofar as the BCS enables (i) formerly independent, competing entities (the participating conferences and bowl games) to collectively determine the amount of revenue to be distributed to BCS participants, and (ii) various BCS bowls to forgo competition by collectively selling their broadcast rights to television networks. In either case, harm to consumers could be established by pointing to the fact that both ticket prices and television fees rose significantly following the formation of the BCS, costs that have ultimately been shouldered by consumers. While some of these increases can undoubtedly be attributed to higher demand resulting from the BCS's creation of a national championship game, at least some portion is almost certainly the result of the elimination of competition between the formerly competing entities.

Therefore, contrary to the recent statements of the BCS's Executive Director, I do not believe that the consumer welfare defense would necessarily save the BCS from an antitrust suit. While the defense may ultimately enable the BCS to prevail in a group boycott case, there are strong arguments to the contrary available to a plaintiff challenging the system under such a theory. Even then, the defense likely would not offer the BCS protection against a possible price fixing claim. As a result, I believe that the BCS currently remains vulnerable to an antitrust attack.