Supreme Court Ruling is Front and Center in Kings/Sonics Saga

Yesterday's news was very significant.

The announced backup offer established an alternative which will provide existing team ownership with operating capital necessary to carry on with franchise operations whether or not relocation to Seattle is approved. In doing so the Hansen group has further secured the Maloofs commitment to this transaction, preventing them from backing out no matter how much pressure is applied by the NBA.

One way or another the NBA will be forced to vote on this sale. If they approve the transaction but deny relocation they will create an admittedly terrible situation that extends this horrible drama for a long as 2 additional seasons. Alternatively voting to deny the sale on any grounds will open the door for an antitrust claim that could dramatically impact the league for an even longer period of time.

The core issue for any potential litigation would be the right to restrict individual franchise owners from entering into binding contracts without the league's prior approval. NBA attorneys would likely argue that in the matter of franchise sale and relocation the teams operate as a single entity with common goals, operating outside of antitrust protection in order to preserve competitive balance for the greater good of all teams.

This right to restrict franchise from entering into contracts was last tested in 2010 when American Needle VS the NFL took the matter before the United States Supreme Court. A case that Michael McCann, a legal analyst with Sports Illustrated, dubbed the "most important case in sports history"

American Needle won this case when the Supreme Court determined that, in the case of marketing operations the teams did not in fact operate with a joint conscious but rather compete as separate companies. McCann, who has written multiple papers on the case warned SonicsRising.com via e-mail correspondence that antitrust litigation is fraught with risk:

"(B)eing subject to antitrust law -- which none of the leagues want -- is not the same thing as being likely to lose in an antitrust case. The key will be whether the relevant restrictions on competition (in this case league rules on sale of teams and franchise relocation) are more pro-competitive than anti-competitive. The league would bring a number of pro-competitive arguments to the table, including that they improve the overall quality of the league, as evidenced by growth in league prosperity over the past decades."

The ruling had an admittedly limited scope and clearly specified that some franchises activities outside of marketing may in fact qualify for protection from antitrust law. However page 2, section d of the ruling specifically identifies gate receipts and the ability to attract fans as areas in which the franchises are operating in direct competition, creating an argument that venue and location decisions should be made at the franchise level in order to ensure the business competitiveness of an individual franchise:

(d) The NFL teams do not possess either the unitary decision making quality or the single aggregation of economic power characteristic of independent action. Each of them is a substantial, independently owned, independently managed business, whose "general corporate actions are guided or determined" by "separate corporate consciousnesses," and whose "objectives are" not "common." Copperweld, 467 U. S., at 771. They compete with one another, not only on the playing field, but to attract fans, for gate receipts, and for contracts with managerial and playing personnel.

As an example it could be argued that franchises in larger markets such as New York have access to more lucrative marketing opportunities, larger regional fan bases and significantly higher ticket prices than a franchise located in a smaller market. In preventing the team from seeking markets where more competitive revenue streams existed the league may in fact be restricting their right to compete against the larger market teams. In addition league interference in franchise sales unfairly restricts owners ability to negotiate a profitable sale of their asset by limiting the pool of buyers only to those in cities willing to provide massive public subsidy for the product. An argument could be made that approving franchise moves from Charlotte to New Orleans and of course Seattle's departure to Oklahoma City while denying the Seattle transaction would be indicative of a conspiracy to restrain pursuit of private opportunities in order to continue delivering lavish public subsidies to the existing team owners.

The Hansen group has shown themselves unwilling to relinquish this contractual control but have been willing to voluntarily increase their offer of both purchase price and relocation fee. This astronomical pricing presents the NBA with an opportunity to do the right thing. The league should reconsider its opposition to expansion and pursue a two city solution, embracing the cash being thrown at them, avoiding litigation that could rewrite the rules of their industry and at the same time preventing a catastrophic letdown to one of two great fan bases.

For more of information about American Needle VS the NFL you can review Michael McCann's previous papers on the subject:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1471515

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1550977