Did anyone see this???

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Did anyone see this???

Post by fka on Wed Dec 31, 2014 7:30 pm

does not always equal bad has developed since the trustbusting days of the late-1800s.

In addition to shaping legal standards, the heart of every antitrust case is an economic issue or issues. When a lawsuit is filed, one of the first things the law firms do is hire an economic expert witness - usually a high-level academic and their affiliated consulting firm such as Analysis Group, Compass Lexecon or Charles River Associates to provide support. The expert witnesses and their teams pore through all the documents, help identify key discovery materials or deposition questions to be asked, form the argument for their side and end up writing a report which is the capstone document for each party in the case.

It'll be a long, long time before the UFC lawsuit progresses to the report writing phase, but the complaint gives us an early glimpse into the likely arguments of the fighters' side. Tomorrow we'll dissect its details as well as the UFC's likely responses.

Broad Allegations

There are two elements to every antitrust case: liability and damages. For liability, the fighters claim the UFC has an "overarching anticompetitive scheme to maintain and enhance its (a) monopoly power in the market for promotion of live Elite Professional mixed martial arts bouts, and (b) monopsony power in the market for live Elite Professional MMA Fighter services."

Monopoly deals with the output market (entertainment, ad space and content license sales) while monopsony deals with the input market (fighter services in the labor market). [Note: When the distinction isn't important, I use "monopoly" to cover both monop- terms so things don't get too cluttered.] Notice that the fighters aren't suing the UFC for having a monopoly. It's 100% legal to have monopoly power in the United States. The fighters are suing the UFC for anticompetitively maintaining and enhancing this power.

The fighters allege that "the UFC has engaged in an illegal scheme to eliminate competition from would-be rival MMA Promoters by systematically preventing them from gaining access to resources critical to successful MMA Promotions, including by imposing extreme restrictions on UFC Fighters' ability to fight for would-be rivals during and after their tenure with the UFC." This is the heart of the case. This statement has the makings of an economic argument predicated on raising rivals' costs via long-term, exclusive fighter contracts.

The basic idea is that a company can gain an advantage over its rivals (other MMA promotions in this case) by undertaking actions that make it more difficult for the rivals to be effective competitors. A great way to do this is to prevent them from having access to something that's critical to compete. It appears the critical resource is elite, professional MMA fighters in this case.

For an example outside of fighting, there was an allegation of raising rivals' costs in sports video games when Sega got aggressive with NFL 2K5 and decided to price it at $20. Electronic Arts responded by reducing the price of Madden NFL from $50 to $30 and probably wasn't too happy about it. By next season, EA had acquired an exclusive license for NFL name, image and likeness rights, preventing Sega from accessing a critical resource for professional football video games. Sega's NFL 2K was nowhere to be seen and magically the price of Madden rose to $50 again.

The problem is not all exclusives are anticompetitively harmful, even though some may be annoying. Have you ever been at a restaurant and wanted a Coke but all they had were Pepsi products? Exclusive. Have you ever wished LeBron could play some games for your NBA team but he's locked-up with the Cavs? Exclusive. Have you ever wanted to buy a new Ford but the Toyota dealership wouldn't sell you one? Exclusive. Remember wanting the iPhone when you were with Verizon and not getting it because it was only available for AT&T? Exclusive.

Exclusive contracts aren't always anticompetitive. They can have perfectly legitimate business justifications and you can be guaranteed the UFC's side will vehemently argue all of them.

And that leads us to damages. "The UFC has used the ill-gotten monopoly and monopsony power it has obtained and maintained through the scheme alleged herein to suppress compensation for UFC Fighters in the Bout Class artificially and to expropriate UFC Fighters' identities and likenesses inappropriately."

The claim is that the UFC is able to keep fighter compensation low and better extract image and likeness rights because they anticompetitively maintained and enhanced their monopoly power. If not for this conduct (known as "but-for"), fighter compensation would've been be higher. How much higher, over what relevant market and for how long determines monetary damages.

Pre-Trial Procedures

Now that the complaint's been filed, we move to the pre-trial phase of the case. The UFC will answer the complaint by denying the fighters' allegations, admitting certain limited facts and providing additional defenses. These additional defenses are often a bunch of legalese that make my head hurt worse than a Remy Bonjasky roundhouse to the dome, but they also often include important defenses that the conduct has a legitimate business justification, promotes competition and/or was done to meet the competition.

The complaint might be amended and the UFC will likely try to have the entire case dismissed in short order. The UFC will also fight like hell to keep the class from being certified. Prospective damages from a class action with all UFC fighters are far more significant than damages with only Le, Quarry and Fitch. If the class doesn't get certified, the case is likely over. The fighters could continue to pursue their individual claims but the potential rewards often don't cover the costs of litigating.

Along the way the discovery process will begin. Documents will be exchanged, interrogatories (questions one party asks the other that must be answered truthfully under oath) will be asked and answered and depositions with key players (fighters, UFC executives and other relevant parties) will be scheduled. The economic expert witness teams on both sides will get up and running.

If the case survives all the early challenges, expert witnesses will submit their reports and rebuttals to the other side, and both sides will surely move for summary judgment. This is the phase where one party asks the judge to essentially rule that no reasonable juror would ever side with the opponent, even when looking at the evidence in a light most favorable to the opponent. They're essentially asking a judge to say there's no way the other party will win so we shouldn't waste the time, effort and expense of a trial. This is a critical phase as the judge may rule on the entire case or rule on partial elements which will then be taken as fact at the trial and can dramatically alter its substance.

Antitrust cases can be very complex so expect this process to take years if the UFC doesn't win an early dismissal. The key moments for fighters acquiring leverage over the UFC are the motion to dismiss (if it fails), class certification (if it succeeds), the deposition schedule (if Dana White, the Fertittas or other executives don't want to be under oath) and the motions for summary judgment.

Typical Arguments by Plaintiffs and Defendants

"Monopoly power? What monopoly power? I have no idea what you're talking about."

When being sued for the illegal acquisition or maintenance of monopoly power, the best defense is to not have any power. How can you illegally acquire or maintain that which you never had in the first place? Look for the UFC to make this argument and provide evidence that they compete with boxing, the NFL, the NBA, other sports, the movies and maybe even restaurants and bars for the consumer's entertainment dollar. In the labor market, look out for evidence that they compete with Bellator, WSOF, One FC, other MMA promotions and sometimes professional wrestling to sign and retain fighters, and to show that competitors have not only been entering but are expanding. They also may make the argument that bidding markets - such as bidding for fighter services - don't need many players to be competitive.

The heart of the monopoly power matter is the relevant market. Defendants like to say, "What monopoly power? There's competition everywhere and the relevant market is huge!" If the relevant market is large, a defendant's conduct will foreclose or affect a smaller percentage making it not look as bad. If the relevant market is small, the conduct will affect a larger percentage making it look worse. The rule of thumb is plaintiffs want small relevant markets and defendants want large ones. Put another way, plaintiffs claim there's not much competition while defendants claim there's competition everywhere.

We haven't heard from the UFC yet, but the fighters have already revealed their interest in a small geographic market by claiming "the relevant geographic market for both the Relevant Input Market and Relevant Output Market is limited to the United States and, in the alternative, North America." (emphasis added) They push for something small but then accept North America as a possible alternative. While not their preferred option, they then go on to allow for the possibility that the relevant geographic market may be the entire world.

One of the most difficult conceptual elements of antitrust is that the laws are in place to protect competition, not competitors. Driving people out of business is part of the competitive process and the antitrust laws are not meant to deter that type of aggressive, competitive conduct. Plaintiffs will often focus on the injured competitors or those going out of business as evidence of competitive harm, whereas defendants will often focus on the strong competitive forces from those still in the industry and those who have entered or will enter in the future.

So far, the fighters are operating according to plan stating, "As a result of the UFC's exclusionary scheme, multiple actual or potential rivals were forced to sell to the UFC or exit the market entirely." We haven't heard from the UFC yet, but look for them to respond with a statement about vigorous competition with other promotions and that while some inefficient competitors have gone out of business, there's been entry and expansion of many others, especially globally.

Monopolization claims of exclusionary conduct are analyzed under the rule of reason which means plaintiffs must show not only that the conduct was harmful, but that the harm outweighed any procompetitive, beneficial effects. They're difficult cases to win, make no mistake about it. Realistically, the best-case scenario here probably isn't a victory at trial, but a reasonable settlement involving likeness rights and possibly contract length and the term of restricted free agency. There's close to a snowball's chance in hell that contractual exclusivity provisions will go away since their efficiency justifications are usually strong.

Not too long ago, the World Poker Tour was sued by its players for antitrust violations and the acquisition of player likeness rights "at a monetary price of zero" to run "in perpetuity throughout the universe." The players settled and didn't receive any monetary compensation but at least got new releases for their likeness rights.

Come back tomorrow at 1pm (ET) when we'll dissect the finer details of the fighters' complaint against the UFC and the UFC's likely responses and procompetitive justifications.

Paul is an economics professor, former provider of expert witness support in antitrust cases and Bloody Elbow's analytics writer
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Re: Did anyone see this???

Post by fka on Wed Dec 31, 2014 7:50 pm

That was a breakdown of the ufc lawsuit what follows is the continuation....

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Re: Did anyone see this???

Post by fka on Wed Dec 31, 2014 7:59 pm

what's going on and how things are likely to progress.

I've spent a day or so reviewing the complaint. Normally the minutia of complaints are evaluated over weeks and months so I reserve the right to miss something or write something stupid. If that happens, it's clearly all Mookie's fault.

Pages i-1

As discussed yesterday, the fighters claim the UFC (1) has monopoly and monopsony power (again, I'll generically use the term "monopoly" when the distinction between the two isn't important), (2) it anticompetitively maintained and enhanced its power, (3) by preventing rival MMA promoters from "gaining access to resources critical to successful MMA Promotions," namely access to elite, professional MMA fighters.

The Table of Contents on pages i-ii lay out the fighters' arguments. They first have to prove the UFC has monopoly power (Section VI) - you can't maintain or enhance power you don't have - and then argue that anticompetitive, exclusionary behavior led to the maintenance and enhancement of this power (Section VII) as opposed to the UFC having a superior product or business acumen.

We're going to skip some elements of the Section I summary since they'll all be examined in the body of the complaint.

Page 3

We get our first taste of the anecdotes and "bad quotes" that are thrown into most antitrust cases when available. Plaintiffs like using any public statements making it look like there's no competition, if nothing else than to subtly affect the judge, jury or public perception. They quote Lorenzo Fertitta:

"We are like football and the NFL. The sport of mixed martial arts is known by one name: UFC."

And Dana White:

"There is no competition. We're the NFL. You don't see people looking at the NFL and going, ‘Yeah, but he's not the best player in the world because there's a guy playing for the Canadian Football League or the Arena League over here.' We're the NFL. There is no other guy."

The UFC will argue these statements are just promoters being promoters. They may look bad but aren't uncommon. Microsoft had a bad quote in their famous antitrust case that they would "cut off Netscape's air supply." American Airlines once had to deal with a memo stating they would, "drive [Vanguard] from the market." These anecdotes give the perception that a company is trying to exclude rivals, but remember antitrust protects competition not competitors. The essence of competition is to beat up your rivals so, from another perspective, who doesn't want to cut off their competitor's air supply and drive them from the market?

Plaintiffs aren't the only ones to use anecdotes. Defendants do the same thing, except they're looking for good quotes or public statements that make it look as if there's ample competition and low barriers to entry. Don't be surprised if the UFC uses quotes about entry barriers and the importance of business acumen, like this one from Scott Coker:

"It's not hard to be a promoter. You know, just go to California, pay $100 or $500 or whatever your license is, right? So the barrier of entry is really the easy part. And then, you know, you've got to have some guts, you know, and invest your money."

Or this one from Lorenzo Fertitta:


"There's literally no barrier to entry. Anybody that wants to get into the business, they can go file for a promoter's license and put up some capital, go sign fighters and go get a television contract. There's [sic] plenty of options there too. It's a wide open market for anybody that wants to get involved."

Or this one from Dana White:


"There's no barrier to entry to get into this. All you need is a bunch of cash and a big set of balls. There's no barrier to entry to get into this thing. It's not like we make computer chips or something."

At the end of the day, quotes are just words uttered while not under oath. They may look good or bad, but the real evidence on barriers to entry in MMA will come from depositions, declarations and the data collected on how the market has evolved over the years.

Page 5

Remember the raising rivals' costs claim from part 1 yesterday? Here it is explicitly:

"The UFC denied actual and potential rivals necessary inputs to run effective professional MMA Promotion companies, raising their costs and making it impossible for them to compete effectively." (emphasis added)

Then we get more bad quotes and anecdotes: Dana White with an RIP sign with IFL, EliteXC and Affliction logos on it; Dana White stating, "I'm the grim reaper, motherf***ers"; White and the Fertittas in front of a screen with the words, "World F**king Domination Reshaping the Sports World."

Don't be surprised if the quote on page 7 comes back to bite the plaintiffs in the ass. They quote Dana White as stating:

"There was a time when it [competition in the MMA industry] was neck-and-neck. That time is over. There were times when we were in dogfights, but everybody needs to just concede and realize we're the [expletive] NFL. Period. End of story."

They're using the quote as an anecdote about the UFC's dominance but the UFC may flip it to support the notion that there was a time when competition was neck-and-neck - meaning no monopoly power. Often in antitrust cases, defendants will look back to a time when markets were clearly, unambiguously competitive and show that the same conduct that's currently being challenged was used in a competitive market. How can long-term exclusive fighter contracts maintain or enhance monopoly power when there clearly was none years ago? This could help the UFC support its argument of the legitimate business justifications of the contracts.

Page 11

An "Elite Professional MMA Fighter" is defined. The definition includes all UFC fighters and "any Professional MMA Fighter who has demonstrated success through competition in local and/or regional MMA promotions, or who has developed significant public notoriety amongst MMA Industry media and the consuming audience through demonstrated success in athletic competition."

The plaintiffs include the phrase "local and/or regional MMA promotions" in their definition of an elite, professional MMA fighter (with a caveat). The UFC will no doubt propose a greatly expanded relevant output market. On the input side for fighter services, they'll likely propose a larger relevant market, but also may use the "local and/or regional" language in the plaintiffs' own definition to support a position that the plaintiff's relevant market for fighter services is larger than originally intended. Every little word matters in these situations. The UFC could try to claim that if Fight Pass prelim fighters are "elite" in their very first UFC bout then they were elite before leaving their last promotion, thus implying that any promotion from which they've ever pulled a fighter contains elite, professional MMA fighters.

Pages 14-20

This is the legalese involved in class action lawsuits.

Pages 20-25

The plaintiffs describe monopoly power in the relevant output market, defining it as the "promotion of live Elite Professional MMA bouts."

To be honest, I'm not 100 percent sure why they include a discussion of monopoly in the output market when their claim of economic harm is reduced fighter compensation and identity exploitation in the input market. I think they're including it because there's very little cost of doing so. Oftentimes, plaintiffs will initially include as many claims as they can and subsequently let non-starters get filtered out along the way. The worst-case scenarios are withdrawing the output market claims later, losing them at summary judgment or losing them at trial.

On page 21, the plaintiffs claim:

"Combat sports such as boxing or those that are limited to a single martial art, such as judo, are not adequate substitutes for live Elite Professional MMA. There is no meaningful market substitute amongst the television-viewing and ticket-paying audience for the sport of MMA."

Expect the UFC to tear into this with reckless abandon. The thought process for a relevant market is one of demand substitution. In the face of a price increase, how will consumers change their behavior (see the Federal Trade Commission's (FTC) SSNIP Test for more information)? Single martial art status says nothing about demand substitution - just like if I'm watching football (a team sport) it doesn't mean my next best option isn't watching tennis (an individual sport). The real issue is how consumers actually behave. The plaintiffs mention cross-[price] elasticity of demand in passing, and that's where the experts will focus their attention. Plaintiffs will look for any and all information that shows other sports aren't good substitutes and the UFC will look for any and all information showing that consumers easily switch to other things.

In a weird way, this past year may be good for the UFC. Their pay-per-view numbers have taken a hit as their marketable stars have been lacking. What's that show? The UFC will argue it shows consumers are switching to other activities. They may also say it shows how consumers respond to a quality-adjusted price change. They may use ticket sales data and comps to show how consumers respond to ticket price changes, quality (main event matchups) and other competing events. PPV data, while not great for examining price changes since they adjust so infrequently, may also be used to look at the effect of card quality and competing boxing, NBA, MLB, NHL, Olympic or other major events. The plaintiffs will be examining the exact same data and if it shows consumers don't respond very much, they'll use it as evidence of a small relevant market.

As mentioned in part 1, relevant markets are absolutely critical to antitrust cases. The fighters are arguing for a very small relevant output market while the UFC will fight like hell to demonstrate it is very large.

Relevant markets have two components: the product market and its geographic scope. In other words, what products are contained in the market and how far do they extend geographically. Plaintiffs claim the geographic market is the United States, North America in the alternative, and the entire world at worst. More specifically, they state:

"A bout which neither takes place in the U.S. nor is broadcast into the U.S. is not in the geographic market."

Any elite, professional MMA bout that takes place in the U.S. or is broadcast into the U.S. is in the relevant geographic market. The UFC will contest the meaning of "elite, professional MMA" but likely won't fight the notion that, geographically, a sporting event needs to be broadcast into the U.S. It should be pretty clear that U.S. consumers won't switch in droves to MMA, football, basketball or other events not broadcast into the United States. But the UFC may attack the implied definition of consumers as being only MMA fans. Advertisers are also consumers of UFC services and the question of whether they would switch towards advertising events in Europe if prices in the U.S. or North America got too high is a relevant one.

Paragraph 65 is irrelevant. The resources a promoter needs to stage an event (venue, referees, judges, etc.) have nothing to do with how consumers might switch their behavior across geographic locations.

Pages 24-25 include a few "placeholders." These are things that are inserted into a complaint or report, no matter how brief, that can then be revisited in more detail later should it be deemed necessary.

"The UFC possesses the ability to preclude or delay new entry into the Relevant Output Market."


"The UFC enjoys high profit margins on its sales in the Relevant Output Market."


"The UFC receives approximately 90% of all revenue generated by MMA events from the Relevant Output Market."


"Barriers to entry in the Relevant Output Market are high."

Page 25 contains another statement that might get flipped on the plaintiffs.

"In terms of promotions, prospective market entrants cannot enter the Relevant Output Market unless they can attract and retain Elite Professional MMA Fighters. Actual or potential rival promoters cannot attract and retain necessary Elite Professional MMA Fighters unless they can demonstrate that they can promote a profitable bout that will result in potentially competitive compensation to the fighters."

The UFC may use this as the plaintiff's acknowledgment of the value of network effects in this industry. A network effect is essentially where a large network or installed base increases value to consumers. We like that there's one big Facebook because all of our friends are on Facebook. We like knowing we can keep a Visa card in our wallet and use it almost anywhere - even if it's only a backup to Amex.

Network effects in sports are the reason two leagues battle it out and only one usually wins. The basic idea in MMA is that fighters' value being in the limelight where the competition is best (and pay is highest). Consumer's value watching the best fighters in the same promotion competing against each other. The UFC may flip the plaintiff's quote and argue that it shows the value of a strong network, and that when rival promotions went out of business they didn't do so because of exclusionary conduct but because of the UFC's superior product and network. They would also argue that large network effects have great value to consumers who are the primary focus of antitrust.

Pages 25-30

The plaintiffs define the relevant input market the same as the relevant output market in the sense of "Elite Professional MMA" fighter services. The label doesn't matter; it's the justification that counts.

The plaintiffs' chances of success are slim in the output market, but the input market is where the real dispute will take place. How are fighters willing to substitute the supply of their fighting services across promotions and geographic locations?

I don't think the UFC will fight too hard to expand the relevant input market beyond MMA for many of the reasons described in the complaint. Input market disputes will likely be over the use and definition of "elite" and the geographic scope being global as opposed to the U.S. or North America.

The plaintiff's focus on MMA fighters as unwilling or unable to transition to other sports such as boxing, professional wrestling and the like. But they don't give much attention to the size and scope of relevant MMA promotions. Both sides could end up using historical competitive effects as evidence in this regard. When the UFC purchased rivals or they went out of business, what happened to fighter wages? If they declined, it supports a smaller relevant input market. If they remained unchanged or increased, it supports a larger one. Also, look for the UFC to argue that the plaintiffs' focus geographically on U.S. fighters leaving and competing abroad whereas a big component of competition for fighters is acquiring new talent from abroad.

Once the relevant input market is established, the actual market participants need to be determined for monopsony power. An important consideration is what the FTC calls "rapid entrants." A rapid entrant is an MMA promotion that's not a current competitor in the relevant market but would quickly enter or start competing for talent in the event of a significant reduction in fighter compensation.

Expect the UFC to run an analysis of entry patterns and competitions for fighter contracts over the years. This is where the private, behind-the-scenes information on contract offers, negotiations, acceptances and right-of-first-refusal matches becomes important. It's the information none of us outsiders are privy to, but some analyst in an office cubicle will spend months of his/her life sifting through and then make a few pretty charts and tables.

Remember the quote about "neck-and-neck"? The UFC may use that idea to compare its fighter compensation relative to other promotions in the early- and mid-2000s to relative compensation today. The argument is that if the relative compensation of fighters today is better (or no worse) than it was years ago when the industry was unambiguously competitive, how could it be exercising any newfound monopsony power?

Page 31

"On information and belief, UFC Fighters are paid approximately 10-17% of total UFC revenues generated from bouts."

This is another leverage point for fighters. In addition to UFC executives probably not wanting to be deposed, the discovery phase of the trial could result in leaks of more precise information as to how the UFC compares to other sports organizations in terms of labor's share of revenues.

Page 32

"By 2001, MMA Promotions were competing vigorously..."

"As an overall result of competition between rival promotions in the Relevant Input and Output Markets through the early 2000s, MMA's fan base grew dramatically; while fewer than 90,000 people purchased the UFC's first MMA PPV event, by 2006, the UFC's PPV events drew more than one million buyers."

The UFC will almost certainly use the last quote as an admission by plaintiffs that the output and input markets were competitive "through the early 2000s" and as recently as 2006. They will try to use 2006, at a minimum, as a baseline for historical comparisons of fighter compensation and contract terms used by the UFC and rival MMA promotions. The argument goes that if there's no monopoly power to abuse, there must be legitimate business justifications. This admission could also hurt Nate Quarry's claim he was exploited when signing his likeness rights away for a hi-five and a ham sandwich if he did so prior to his first UFC bout or his title fight in 2005 in a competitive MMA market.

Pages 33-44

In the remaining pages of the complaint, the plaintiffs take as a given that the UFC has monopoly/monopsony power in the relevant markets and focus their discussion on how the UFC anticompetitively maintained and enhanced such power through "an aggressive series of exclusionary and anticompetitive acts."

"The UFC's illegal monopsony position is sustained, in part, through the use of exclusive dealing agreements with UFC Fighters that lock in Elite Professional MMA Fighter services perpetually and exclusively for the UFC. The UFC's exclusive contracts foreclose would-be rival promoters from vital inputs-namely Elite Professional MMA Fighter services with the notoriety needed to sustain a successful live Elite Professional MMA promotion."

As mentioned in part 1, this is the heart of the fighters' case. They'll go on to talk about venue and sponsor restrictions but this is the key element (outside of monopsony power).

"The ‘Exclusivity Clause,' which binds UFC Fighters into a restricted relationship with the UFC and prohibits them from appearing in bouts televised or organized by actual or potential rival promotions...Regardless of the term of the agreement, the provision includes various termination and extension clauses that can be triggered at the UFC's sole discretion, thereby effectively extending the exclusivity provisions indefinitely."

The fighters' strategy has just been clarified. If a credible economic argument is to be made about raising rivals' costs with exclusive contracts, they must be long term. This is an absolutely essential component to the story. In my experience, exclusive contracts in the range of three years or less are usually viewed as short term. 4-8 years is debatable and 8-10 years or more is generally viewed as long term. This is because contracts don't expire all at once. They're generally staggered.

I once worked on a case where a company foreclosed 100 percent of a critical resource from its competitors with exclusive contracts. That foreclosure rate is insane, but the length of the contracts was the critical component. They averaged about five years which meant around 20 percent would expire and become available for free and open competition every year. The defendant won the case partly because the contracts weren't long enough to put its rivals at a sustainable competitive disadvantage.

In what follows, I'm going to use the Eddie Alvarez contract as a baseline. The term of Alvarez's contract was the earlier of 40 months or 8 bouts. So the worst-case scenario is a length of 3 years 4 months as long as he's reasonably active. This puts the plaintiffs in a real bind as they're going to have a hell of a time showing that 3 years 4 months is long term. The complaint reveals that they likely know this and their strategy will be to downplay the contractual term ("Regardless of the term of the agreement") and focus on the extension clauses ("thereby effectively extending the exclusivity provisions indefinitely").

"The ‘Champion's Clause,' which allows the UFC to extend a UFC Fighter's contract for as long as the athlete is a ‘champion' in his or her weight class..."

According to the Alvarez contract, if the fighter's a champion when the contractual term expires, it'll be extended to the later of 1 year or 3 bouts. On average, fighters fight in 1.7 bouts per year meaning the court will likely view this as a 1 year 9 month extension. Expect the UFC to hammer home that the vast majority of its 500 elite, professional MMA fighters are not champions, meaning their exclusive contracts have lengths of 3 years 4 months at most and are short term. For the 10 elite, professional MMA fighters who are champions, their contract length is a maximum of 5 years which the UFC will probably argue is still short term, doesn't foreclose rivals since 2 champs should expire per year on average and is an insignificant percentage of the relevant market.

The plaintiffs will surely have a different story. They'll claim champions can be extended in successive 1 year terms, thus making the exclusive contracts very much long term. They also may argue that many champs sign an extension before their contracts expire. I'm not sure how they'll handle non-champions, who make up the vast majority of the relevant market but it appears that restricted free agency will play a role.

"The ‘Right to First Offer' and ‘Right to Match' Clauses, which grant the UFC the option to match the financial terms and conditions of any offer made to a UFC Fighter for an MMA bout even after the Fighter's contract has expired. Because the UFC's contracts typically have already required the Fighters to divest themselves of ancillary rights associated with the sale of their Identities in perpetuity, rival offers, to the extent they could even exist, would not include compensation for rights associated with the Fighters' Identities and thus are artificially suppressed or would force would-be rivals to bid to such a level to make the investment no longer profitable."

Now things are getting good! It looks like the plaintiffs are going to argue that champions can be extended indefinitely (long term) and while non-champions may have short term contracts, they become restricted free agents upon contract expiration and are damaged goods who don't have full likeness rights to sell to competitors. To the extent this is true, the plaintiffs could be on to something. If fighters are effectively taxed for signing with other promotions, it could make them less likely to leave and more difficult for other promotions to compete. The devil will be in the details. Reading through the ancillary rights clauses in the Alvarez contract is painful, so this is where lawyers will to their thing and argue the extent of the UFC's reach regarding likeness or identity rights.

If the UFC's likeness rights are found not to hinder fighter movement, the plaintiffs are in a ton of trouble. Wages and salaries negotiated in other sports with restricted free agency, while not a completely free market, are commonly viewed as competitive, even with very few bidders. If the UFC's likeness rights do hinder fighter movement, then the question becomes how much? Is it enough to "force would-be rivals to bid to such a level to make the investment no longer profitable"?

The UFC will also put forth legitimate business justifications for the exclusives. If you were financially invested in an athlete, would you want them competing for others? We know Mark Cuban's answer every time he complains about the Olympics. Now imagine you own a software business and are required to integrate your product with a competitor's. Would you have any concerns? Your responses are legitimate business justifications for exclusivity.

The UFC will probably put forth justifications along the lines of protecting its financial investments in developing the fame and notoriety of its fighters, protecting them from unnecessary injury, protecting its brand image and not wanting its name and fighters associated with an potentially inferior brand, having dedicated fighters who focus more effort towards the UFC brand in-cage and out, etc.

"The ‘Sponsorship and Endorsement Clause,' which grants the UFC sole discretion over all sponsorship and endorsement approvals. In effect, the Sponsorship and Endorsement Clause requires the approval of the UFC before an entity can contract with a UFC Fighter to sponsor or endorse the entity's product or service during any UFC events."

Expect the UFC to focus in on the last phrase, "during any UFC events," and then offer legitimate business justifications. Requiring sponsors to be dedicated and not work with rival promotions has similar business justifications to the exclusive contracts mentioned above. In terms of economic harm, the contracts with sponsors may or may not be long term, but the bigger issue will likely be the rate of foreclosure. The UFC may have a large percentage of elite, professional MMA fighters under exclusive contract, but do they have a large percentage of all possible sponsors locked up?

The sponsor tax is another restriction. The UFC will probably justify the restraint as protecting its brand image (e.g., keeping out the Condom Depots of the world). But the plaintiffs could then have another argument. Antitrust law states that if a sufficiently pro-competitive justification is provided, the burden shifts back to the plaintiff who must demonstrate "the restraint is not reasonably necessary to achieve the stated objective." The question then becomes could the UFC have protected its image from fighters' choices of in-cage sponsors in a manner less restrictive than the sponsor tax? This will be irrelevant when the Reebok era rolls around, but is still very relevant in the class period of this case.

Many of the anecdotes and stories in this section are interesting to read and look bad but aren't particularly relevant to antitrust. The UFC is a single entity, as opposed to other sports leagues that are organized as collections of teams and owners. Single entity status gives an organization much more leeway in dealing with suppliers and customers than a collective or cartel would have (without an antitrust exemption).

"As a result of the UFC's dominance in the Relevant Markets and as part of its exclusionary scheme, the UFC imposes exclusivity provisions into its physical venue agreements that severely limit, and in some cases remove altogether, the ability of any would-be competitor to hold MMA events at premier venues in the U.S."

The argument here is that access to physical venue space is a critical ingredient to being a successful rival MMA promotion. The UFC requires a contractual "black out" period prior to and following its events during which time a venue cannot do business with a rival MMA promoter.

The plaintiffs are going to have trouble with this allegation because access to UFC venues is not fundamentally relevant to their claim. Antitrust policy is about preserving market competition. Venues compete to show live events. Whether that competition comes from UFC venues or non-UFC venues is irrelevant so long as there's still reasonable competition. Does sufficient venue space remain for rival MMA promotions to access? The plaintiffs will argue that the Las Vegas Strip is absolutely critical and the UFC will make an exhibit showing all the other reasonable MMA venue space available in the United States. This one won't be pretty, and the UFC can also claim legitimate business justifications.

Pages 44-47

"The UFC's scheme successfully blocked actual or potential rival promoters from accessing inputs necessary to put on successful MMA events and to operate, sustain, and grow successful MMA Promotions that could eventually compete directly with the UFC. This scheme put several actual or potential rival MMA Promoters out of business. Those companies that were not forced to exit the MMA Promotion business by the scheme were weakened to such a degree that selling out to the UFC was the only realistic option."

The plaintiffs are arguing that the exclusionary conduct weakened rivals to the point where they went out of business or sold themselves to the UFC as a last resort. The UFC will likely not dispute the documented patterns of entry, exit and purchases but will have a different story behind them. If the UFC is found not to have monopoly/monopsony power, the whole thing becomes a non-issue as there could be no exclusionary conduct.

If the UFC is found to have sufficient power, its fallback position will be that it has a superior product and superior business acumen, and the antitrust laws don't protect competitors. The Supreme Court has stated, "the offense of monopoly under [Section] 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." In other words, if you maintain monopoly power and put competitors out of business because you have a product customers really like or you make better business decisions, you're not liable under Section 2 of the Sherman Act. This argument is never a first resort as the plaintiffs will be countering with exclusionary conduct claims the whole time. It's a position of last resort - the we're just better defense.

Pages 47-51

"After Impairing Actual or Potential Rivals and Acquiring Virtually Every Would-Be Rival Promoter That it Did Not Put Out of Business, the UFC Relegated all Remaining MMA Promoters to ‘Minor League' Status"

Related to the previous section, the UFC will not only attempt to explain why rival promotions went out of business (in a way that's not exclusionary), but expect them to try to provide evidence that shows rival promotions have grown and become more of a recent threat. This section is the plaintiffs' attempt to thwart that claim.

The plaintiffs argue that all other remaining MMA promotions do not attempt to compete with the UFC and instead serve in a "minor league" capacity. Both sides will use discovery evidence to support their positions. The plaintiffs will look to show little to no mutual competition to sign fighters while the UFC will certainly roll out Gilbert Melendez's contract offer from Bellator and any other fighter free agent or restricted free agent signings where another organization was in play.

This section is last because if the UFC prevails with respect to monopoly/monopsony power, exclusionary conduct or superior business acumen, the issue is moot.

Other Defenses

Two other defenses we might see the UFC employ are that they were simply meeting their competition and that the FTC cleared them of certain antitrust concerns during the class period and found no concerns.

Antitrust laws are not meant to put one company at a disadvantage to its competitors. Therefore businesses are allowed to match their competition on certain behaviors. We might see the UFC claim that other competitors were using exclusive fighter contracts (not necessarily all, just some) back when things were "neck-and-neck." They matched their competition and have been doing so ever since. They might even enter Bellator's restrictive contracts into the record for comparison purposes.

The FTC investigated the UFC/Strikeforce merger in Jan. 2012 and found that "Upon further review of this matter, it now appears that no further action is warranted by the Commission at this time." The UFC will most certainly argue that if the plaintiffs' claims were true and the UFC had monopoly/monopsony power at the time, the FTC never would've allowed it to merge with the second-largest promotion in the world.

Wrapping Up

You can probably tell that things get pretty complex pretty quick when dealing with the particulars of the UFC's exclusionary conduct or lack thereof. I've definitely missed a number of relevant items, but have hopefully explained enough of the key issues to improve your understanding of this monumental case and the ways it might progress. Thanks for hanging in there.

It's highly unlikely this case will reach a verdict or even go to trial. It's also unlikely to be an industry-wide game changer. But it's a first of its kind and who knows what the butterfly effect will be down the road. If the fighters can clear a few key hurdles early on, we could see a settlement that changes or at least clarifies fighters' likeness rights, the Champion's clause and contract expirations.

Paul is an economics professor, former provider of expert witness support in antitrust cases and Bloody Elbow's analytics writer.

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Re: Did anyone see this???

Post by stu3ufc on Wed Dec 31, 2014 8:33 pm

tl:dr

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