League Regulations and Stadium Subsidies in American Professional Sports (Excerpt)

The following article was written by Evan Zepfel.

The recent wave of stadium construction has sparked debate regarding the appropriateness of providing public funding to build these cathedrals to sports.  Beginning with Judith Long’s 2001 Ph.D. Dissertation, “Full Count,”[1] a series of articles in the Wall Street Journal in 2011 and books like Field of Schemes[2] have brought considerable attention to the actual costs that these stadia incur to the local communities.  Despite this backlash against providing public funds for private enterprise, municipalities continue to provide millions of dollars to construct grand stadia.  Due to this trend, it is important to ascertain what factors determine the size of the public subsidy for each new stadium.  Previous research has determined that a credible threat to relocate is the most important determinant of subsidy size in new stadium construction.  However, it is not possible to compare threats to relocate across leagues without first comparing the regulations of the three leagues, as teams in each league are subject to different sets of rules when seeking to relocate.  I seek to determine which of the three major leagues rules (NFL, MLB, NBA) provides teams with the ability to most credibly threaten relocation, and consequently, secure the greatest amount of public funding towards the construction of a new stadium.

Each of the three major leagues has a set of rules established by the league governing its operations, and regulating the actions of its member teams.  While certain sections of those rules are updated and agreed upon by both the league and players’ associations (eg: those found within the collective bargaining agreements, or CBAs), most of the rules governing the day-to-day operations of the leagues and their member teams do not change every time the CBAs expire.  Rather, they are found within the league constitutions.  It is prudent to examine the regulations in each league that govern regulation, as well as any other rules that might affect the ability of cities to effectively compete for a franchise.

Major League Baseball

Major League Baseball is unique in that it defines specific geographic areas that each team “owns”, as delineated in the Major League Rules.  These ‘spheres of ownership’ allow the teams to control television broadcasts and regulate other teams relocating into their territory.[3]  For example, the Los Angeles Dodgers (NL) and Los Angeles Angels of Anaheim (AL), are explicitly given shared control of Orange, Ventura, and Los Angeles Counties in California, while the San Diego Padres are given exclusive control over San Diego County.[4]  See Figure 1 below for a detailed map of MLB territorial allocations.

Figure 1: MLB Territorial Allocations[5]

Notwithstanding the existence of these geographic domains, relocation is possible, although difficult, under the constraints of the rules.  A team wishing to relocate must obtain ¾ of the votes of the owners in the affected league, plus a simple majority in the other league.[6]  However, any team can block another major league or minor league team from playing within 15 miles of its territory.[7]  Since 1990, only one MLB team has successfully relocated (the Montreal Expos to Washington, D.C., becoming the Washington Nationals).

Generally, such strict control over relocation would be considered a violation of antitrust law.  Major League Baseball, however, prizes an exemption from antitrust scrutiny[8] that stems from the Federal Baseball Club v. National League (Federal Baseball)[9] case in 1922.  In this landmark Supreme Court decision, Justice Oliver Wendell Holmes noted that “the business is giving exhibitions of baseball, which are purely state affairs”[10] when he decided that the business of baseball was not subject to Federal regulations (and therefore not subject to scrutiny for violations of Federal antitrust law).  This case spawned MLB’s antitrust exemption, which has since been confirmed by the courts twice,[11] even though the exemption is based on the seemingly false presumption that professional baseball does not involve interstate commerce, and thus, by virtue of the Commerce Clause,[12] cannot be subject to federal law.  Despite the fact that the initial intent of these three cases was to overturn the reserve system that existed in MLB before 1975,[13] their rulings and the exemption they created have been applied to relocation issues.  This exemption allows MLB to maintain strict rules regarding franchise relocation, and since relocation is more difficult for an MLB team than for an NFL or NBA team, an MLB team’s threat to relocate is the least credible of the three leagues.  Consequently, application of my theory would dictate that MLB teams should receive the smallest level of subsidy to construct stadia of teams in any of the three leagues.

Despite the antitrust exemption, teams have still succeeded in utilizing the courts to affect relocation decisions in Major League Baseball.  In Piazza v. Major League Baseball,[14] the court temporarily overturned Federal Baseball and held that the antitrust exemption no longer applied to cases of franchise relocation.  In this case, the San Francisco Giants were not permitted (by vote of owners) to move to St. Petersburg, Florida, even though the prospective owners in Florida offered $115 million contingent on the relocation.  Rather, the Giants’ ownership was forced to accept a $100 million offer to stay in San Francisco, explicitly demonstrating how the inability to relocate freely can exert downward pressure on the selling price a team can command.  This case will be examined in more detail in chapter 5.  Although the antitrust exemption was quickly reapplied to relocation cases in McCoy v. Major League Baseball[15] in 1995, Piazza and other cases[16] were still influential in MLB’s decision to grant expansion franchises to Phoenix, Arizona and St. Petersburg.  The exemption was expanded in Major League Baseball v. Crist,[17] where it was determined that the ability to control the number and location of MLB games was a crucial part of the business of baseball, thus preserving the antitrust exemption granted in Federal Baseball.  Other legal challenges that do not relate directly to the antitrust exemption (Metropolitan Sports Facilities Commission v. Minnesota Twins Partnership)[18] have succeeded as well, but have relied on special circumstances (eg: an injunction prohibiting the Minnesota Twins from breaching their lease of the Metrodome), and are not applicable or likely to succeed in most cases involving relocation.

Relocation in Major League Baseball is complicated by the fact that MLB controls the Minor League Baseball system (known as MiLB).  MiLB is a series of separate, lower leagues that function as a reserve system for the major league teams.  Although minor league teams are generally owned independently of their major league counterparts, they are subject to the decisions of their major league partners and MLB.  For example, the Oakland Athletics’ proposed plan to relocate to San Jose is complicated by the fact that the Giants’ minor league affiliate (also known as the Giants) already plays in San Jose, as well as the fact that the Giants have territorial control over Santa Clara County.[19]  These minor league clubs also can compete with major league teams for ticket sales and television viewership.

Although MLB’s antitrust exemption does not entirely immunize the league from legal challenges to its relocation policy, it does make any effort to relocate against the will of the league significantly more difficult, and decreases the bargaining power that MLB teams hold (in terms of gaining concessions for relocating or threatening to do so) in comparison to teams in the NBA and NFL.  MLB teams are not able to relocate without a significant portion of the league ownership supporting the move, and can be blocked by nearby teams, making it extremely difficult to credibly threaten to move and significantly limiting possible relocation destinations.  For these reasons, and according to my hypothesis, Major League Baseball teams should receive the smallest concessions (in terms of subsidies toward stadiums) from municipal and local governments.

National Basketball Association

The rules regarding relocation in the National Basketball Association Constitution impose restrictions similar to those in Major League Baseball.[20]  They prevent teams from relocating without the consent of the NBA Board of Governors, and take into account factors like the proximity of other teams to the proposed relocation destination, the profitability of the new destination for the team and for the league, as well as any state or local laws or regulations that might inhibit or prohibit an NBA team’s success in a new destination.

Despite the perceived restrictiveness of the NBA’s relocation rules, their actual implementation is considerably more liberal when considered in the light of the specific case law that has helped to define and apply them.  Unlike Major League Baseball, the NBA does not enjoy an antitrust exemption, and is thus subject to “rule of reason” analysis in cases regarding relocations.[21]  Although the league has attempted to utilize MLB’s exemption in its own relocation cases, the league has not been successful in transporting its application from the MLB to the NBA.

“Rule of reason” analysis stems from the U.S. Supreme Court’s 1911 decision in Standard Oil Co. of New Jersey v. United States.[22]  The logic underlying the “rule of reason” and laid out in the majority opinion maintains that a monopoly itself is not inherently illegal, but rather, that an examination of the effects of the restraint of trade is necessary to determine whether the monopoly is detrimental.  A restraint of trade that either does not affect or which increases competition is legal, while one that decreases competition is illegal.[23]  This differs from a per se analysis, where the Court’s mere identification and categorization of the restraint of trade is sufficient to find it illegal.[24]  “Rule of reason” analysis was applied to the NBA by the decision in NBA v. San Diego Clippers Basketball Club[25], following the precedent of Raiders I and Los Angeles Memorial Com’n v. National Football League (Raiders II),[26] which will be discussed in detail in section 3.3.

As in Major League Baseball, non-league parties have challenged restrictions on teams’ rights to relocate based on alternative legal theories (other than antitrust violations).  In 2007, Oklahoma City native Clay Bennett, who had just come off of an unsuccessful effort to persuade the local Seattle government to build a new arena to replace the dilapidated Key Arena, purchased the Seattle SuperSonics.[27]   Despite the fact that the Sonics had a lease to play in Key Arena until 2010, Bennett began the process to move the team to Oklahoma City just months after he purchased the franchise.  The city sued immediately for damages, and attempted to use their suit to force the team to remain in Seattle.  Part of the problem that the city faced in forcing the Sonics to stay dealt with the intangible benefits of having a team (e.g., that the damages to the city would be more than the loss of contractual revenue under the lease should the Sonics leave).  Sports economist Andrew Zimbalist was called in to testify that the breach of contract would cause great damage to the city, and that monetary damages would not be sufficient to compensate the city for the breach of contract.  Rather, the city wanted the court to compel the Sonics’ “specific performance of the lease,” meaning that the Sonics would be required to play out the remaining years in their contract in order to appropriately compensate the city for its investment in the arena.  However, it is unclear whether this strategy would have worked, since the Sonics and the city reached a settlement that allowed the team to relocate before a decision was rendered.

Like MLB, the NBA oversees a lower-level basketball league that functions as a reserve system.  This league, known as the NBA Development League (or D-League), is comprised of 16 teams, some of which are owned directly by NBA teams.  However, since the NBA exerts greater of control over this lower league than does MLB wields over MiLB, it is less of a consideration for relocation issues, and does not present problems to clubs attempting to move.

The absence of antitrust protection makes the NBA’s rules regarding franchise relocation more difficult to enforce than those in MLB.  Although the NBA has had some success using legal challenges to restrict franchise movement, the more recent court decisions as well as the recent wave of relocations in the NBA might lead one to believe that a threat to relocate in the NBA is more credible than in the MLB.  The “rule of reason” analysis applied in NBA relocation cases gives the league less control over the ability of teams to relocate.  Thus, following the logic laid out earlier in this thesis, NBA teams should receive higher subsidies toward constructing a new stadium or remodeling an existing stadium than teams in MLB.

 National Football League

Like MLB, the National Football League explicitly defines the territory controlled by each team.  According to Article 4.1 of the NFL Constitution, each team has the exclusive right to control all professional football competitions involving NFL teams within its territory.  Each team controls as its “Home Territory” the area 75 miles in all directions from the limits of the city in which the team is based.[28]  This rule also implicitly gives the team controlling each territory the right to control movement into the territory, as any team playing a game in another team’s “Home Territory” without the consent of the “Home Team” would be in violation of the NFL Constitution.  These territories do not grant the teams as many rights as MLB territories do, as the NFL also does not enjoy the same antitrust exemption as MLB and thus cannot utilize territorial restrictions to the same extent or in the same manner.

In addition to the rule giving each team control of its “Home Territory”, the NFL attempts to curb relocation by requiring ¾ of all NFL teams to vote in favor of any move, even if a team wishes to move to another site within its territory.  This means that if a team wishes to move from a suburb into a downtown area within the same territory, the relocation must be approved by the same number of teams that would be required to approve a cross-country move.  A team wishing to move to a site within the “Home Territory” of another club requires a unanimous vote of all of the clubs, meaning that the club whose territory is being infringed upon can singlehandedly veto such a move.[29]  The League also reserves the right to restrict movement into areas that are not within the ‘Home Territory” of any club, and also requires approval of any move into unoccupied territory by ¾ of all NFL teams.  Clubs wishing to relocate are also required to pay a transfer fee to the League, depending on the effect the move might have on other clubs, as well as the League’s ability to generate revenue.  The amount of this fee is subject to the commissioner’s discretion.

The NFL Constitution also delineates criteria that may be considered by the League when a franchise is pursuing relocation.  These criteria include, among other things, the level of fan support in the current city, the financial standing of the club, as well as the location of other clubs relative to the club proposing to relocate.  However, the League can also consider the condition of the team’s home stadium, the level of support from local governments toward updating the stadium or constructing a new one, and the proposed level of subsidy in other potential relocation destinations.  This section of the NFL Constitution is particularly interesting, as it is the only place in the rules of the three major leagues where subsidy support for stadiums is explicitly taken into account when considering relocation.  This specific section of regulation might allow NFL teams to benefit the most from greater public support for a new stadium (in terms of the proposed level of subsidy in a new stadium) since the League specifically considers such factors when making decisions regarding relocation.

Despite the seemingly harsh appearance of regulations regarding relocation in the NFL, case law has eroded many of the NFL’s controls over franchise relocation, most notably in the Raiders cases that involved the club’s movement to Los Angeles and subsequently back to Oakland in the mid-1980’s.  After the Los Angeles Rams moved from the Los Angeles Coliseum to Anaheim Stadium, Oakland’s owner (Al Davis) decided to attempt to move his Raiders into the newly vacant Coliseum, but the NFL rejected his proposal since it did not receive the unanimous approval necessary, prompting Davis to sue.

This case, commonly known as Raiders I, set the precedent for the application of rule of reason analysis to relocation cases in professional sports outside of MLB.  The jury found that the NFL was not a single entity, as it had protested, [30] but rather that “the NFL teams were sufficiently independent and competitive to find under a rule of reason analysis that the anticompetitive harms outweighed the precompetitive effects of the rule.”[31]  This led the Court to allow the Raiders to make the move to Los Angeles, despite the club’s failure to meet the NFL guidelines for relocation.  More recently, in American Needle v. NFL,[32] the Supreme Court applied rule of reason analysis when it examined and upheld the NFL’s single entity status, in the context of a case involving the appropriation of exclusive apparel contracts.

The NFL, however, did prevail in a subsequent case referred to as Raiders II,[33] in which the League sued the club on the grounds that the Raiders had “unilaterally appropriated the value of a location for a professional football team that the league as a whole had created and owned.”[34]  Although the Court in this case decided in favor of the NFL, the decision failed to prevent the relocation of the franchise, and rather held simply that the Raiders were not entitled to the damages granted by the lower courts due to the interpretation of Rule 4.3.  Victor Kiam, owner of the New England Patriots in 1988 also sued the League on the grounds that Rule 4.3 provided an illegal restraint of trade, but his claim was dismissed as he had signed a waiver of his right to sue.  The court, however, maintained that rule of reason analysis applied to relocation cases in sports, noting that “some restrictions on trade are illegal per se, others, such as trade restrictions on sports leagues, are analyzed to determine whether the restriction’s ‘harm to competition outweighs any precompetitive effects’.”[35]  These cases substantially undermine the effectiveness of Rule 4.3, and diminish the ability of the League to effectively deter a club from moving, thus increasing the credibility of any threat by an NFL team to relocate.

Further NFL regulations designed to maximize the level of parity through revenue sharing and restrictions on player movement also give NFL franchises a distinct advantage over franchises in the other two leagues in terms of relocation.  As previously mentioned, the NFL, unlike MLB or NBA, shares television revenues equally among all of the teams as a result of the league, rather than individual team ownership of the television contract.  This league ownership means that each team gets an equal payment from the league regardless of the size of the local television market, and that individual teams in larger markets are not able to bargain for larger contracts and thus benefit from their location in larger markets.[36]  This regulation evens the playing field for cities competing for an NFL franchise, as smaller cities are not forced to compete with the draw of larger television audiences that larger cities promise, since teams receive an equal share of the league’s television contract regardless of the size of the audience for each individual game.  Article 4.3 of the NFL Constitution specifically mentions that the central purpose of relocation restrictions is to maintain fan support in the home territory and to prevent clubs from seeking greater revenue streams elsewhere (through larger television contracts, among other things).  These rules regarding the division of television revenues, however, facilitate franchise relocation as they decrease the bargaining power that cities with larger television audiences have over smaller ones, allowing a larger number of cities to bid on the same franchise.

Additionally, the NFL imposes strict limits on player salaries.  This restrictive salary cap reduces teams’ the need for large revenue streams in order to obtain the best players.  This cap, in addition to other rules that restrict player mobility, limits the impact that large revenue streams can have on the success of a franchise (in terms of winning games), as teams are less able to ‘buy’ good players than they are in the NBA and MLB.  Assuming that the primary goal of each NFL franchise is to win a Super Bowl, this gives the clubs the ability to move to cities that might not provide as great of a revenue stream, since the team’s wealth is not as important for obtaining the most talented players as it is in other leagues.  In fact, the NFL’s Green Bay Packers, which is one of the sport’s most successful franchises (2 Super Bowl Championships), makes its home in a city with just over 100,000 people–by far the smallest city to host a professional franchise in any of the three major leagues.

Although NFL franchises are subject to many of the same regulatory restrictions on relocation as NBA franchises, there is an increase in the number of cities that are able to compete for a franchise when one seeks to relocate due to the League’s inability to claim an exemption from antitrust scrutiny in cases regarding relocation, as well as the NFL’s policies intended to increase parity.  While the application of antitrust law to league regulations reduces the NFL’s ability to effectively regulate team relocation, the salary cap and equal sharing of television revenue greatly diminish the marginal benefits of a larger population for franchises seeking to relocate.  This increase in franchise demand, combined with the stagnation of franchise supply levels, drives up the price a city has to pay for a franchise, and thus, makes NFL subsidies relatively higher than those in both the NBA and MLB.

Conclusion

Assuming that a credible threat to relocate is the most important factor determining the size of a subsidy for a new stadium, it follows that NFL regulations should allow for the largest subsidies among the three major leagues.  Successful challenges to the League’s relocation policies increase the credibility of relocation threats in the NFL.  Similarly, the League’s regulations limiting player salaries and evenly distributing television revenue increase the number of cities that are able to compete for a fixed number of franchises.  This increase in demand for franchises, combined with the constant demand (barring league expansion) should drive up the price for NFL franchises (in terms of the size of the subsidy required to induce a franchise to relocate).  A statistical examination of subsidies in the three major leagues since 1990 confirms this finding, as NFL teams receive an average of almost 70% of construction costs from public sources.

For further details on the statistical portion of this thesis, visit: http://harvardsportsanalysis.wordpress.com/ or contact the author ezepfel@post.harvard.edu