Stop the Football Merry-Go-Round

Tuesday, March 29, 2011

In recent months, most of the public attention on the union question has been devoted to the status of collective bargaining rights for public unions in such bellwether states as Wisconsin and Ohio. In those cases, the key issue is whether the outsized structure of pension and benefit programs can be pared back without a fundamental restructuring of the negotiating system that generated them in the first place.

At the same time, and at the opposite end of the financial spectrum, a second labor dispute is now in motion that could result in the cancellation of the National Football League’s 2011-2012 season because of a breakdown in the renegotiation of the players’ labor contracts. The looming disintegration of collective bargaining with public unions is not relevant to this particular debate, for there is surely enough to go around in one of the world’s most lucrative sports. The question here, rather, has to do with the division of the spoils between management and players in a sport that has proved spectacularly popular in recent years. That issue in turn arises because of the peculiar structure of these negotiations, which pits management en masse against the labor unions in what appears to be yet another illustration of the fragility of collective bargaining arrangements in which each side has no option but to deal with its opponents.

Illustration by Barbara Kelley

In most ordinary labor negotiations, everyone understands that labor unions gain real advantages under the National Labor Relations Act of 1935, which was crafted for their benefit. Yet on March 11, 2011, the National Football League Players Association decertified itself in the wake of prolonged and fruitless negotiations with the team owners. Although the owners have protested that the players had bargained in bad faith under the labor statutes, the former union members claim that none of that matters now that the union itself has been decertified by the players.

The question is, why did the players take this weird legal stand? To anyone who is, as I surely was, ignorant of the NFL’s checkered labor-relations history, the NFLPA’s actions made as much sense as laying down a knife in a street fight. Yet unions—even players’ unions—are not known for their tendency to commit financial suicide, and rest assured that the erstwhile union members did not do any such foolish thing.

Holding all the cards, the players keep a lion’s share of the pie.

On this matter, the class action complaint filed by the Patriots’ Tom Brady—and other NFL luminaries in their individual capacities—dispels any budding illusions about self-destructive unions. The back-story here is that the NFLPA has skillfully exploited the imperfect intersection between the labor and the antitrust laws in order to gather for itself the best of both worlds.

To step back a moment, the key insight here is that competitive athletic leagues are not like typical competitive industries. In standard competitive markets dealing with the sale of, say, computers or shaving cream, each firm hopes to gain the largest possible share of the overall market, without showing any solicitude for the survival of its opponents. In competitive leagues, however, the road to financial perdition is paved with weekly blowouts of league patsies by well-heeled teams. "On any given Sunday," as they used to say in the NFL, any team in the league could beat any other. To ensure their own popularity and financial success, owners and players alike need to assure some measure of parity among teams to generate the nail biters that keep fans coming back. The objective in this business is not to crush your opponents. It is to be just better enough than your stalwart opponents in order to win championships. This model is truly ubiquitous, for it is the only one that works in league sports, no matter what the profit levels of the teams are.

If the NFL were treated as a single firm, organizing a draft, imposing salary caps, and requiring compensation for players who sign with other teams, these measures would only constitute the internal housekeeping that is intended to preserve the needed competitive balance of the league. These internal operations would take on no antitrust significance because they do not involve any contract or combination among rival firms. But since these teams have independent managers, shareholders, and brands, the courts have uniformly condemned these cooperative league actions as per se illegal "horizontal" restraints of trade entered into by these competitive businesses. The uncompromising dictates of the antitrust laws do not use a "rule of reason" for these horizontal arrangements, their huge economic benefits notwithstanding. Essentially the courts have chosen to attack the monopoly elements of unions, without making any allowances for their huge efficiency gains.

Enter modern labor law, which insulates all collective bargaining agreements from antitrust scrutiny. Under this umbrella, the NFLPA and the owners do two things. First, they adopt an efficient set of contract restrictions to ensure needed team parity. Second, they shed blood in deciding how to divide the $8.5 billion in NFL revenues.

The breakdown in negotiations works a real hardship on fans, hot dog vendors, groundskeepers, restaurants, newspapers, and broadcasters whose livelihood depends on having a season. And for what?

In 2008, the owners opted out of a six-year agreement that had been extended in 2006. Thus, the contract ended after the 2010 season. Their reason for doing this was pure self-interest—to gain a bigger slice of the pie by renegotiation with the players union. In response, the NFLPA demanded ten years of audited financial statements to get a read of the teams’ financial positions. But national labor law requires these disclosures only when management pleads poverty, not when it goes after more profits. It also allows the owners to lock out the players after a bargaining impasse.

This is where the players chose to get off (or is it on?) the merry-go-round. Under current law, once a union decertifies itself, the antitrust law once again brands that lockout an illegal collective refusal to deal. And so, the players begged for a return to the natural "competitive" state—which, if implemented, would ruin both sides financially, as explained earlier. In so doing, the players used a huge club of treble damage antitrust actions against the owners. The players also brought all sorts of state law claims, saying, for example, that teams remain obligated to uphold individual player contracts even if the season is canceled.

To make matters worse, this entire wacky scheme is embedded for all time in a 1993 antitrust consent decree that contains an odd provision whereby, as the players allege, "the NFL insisted on the right to terminate the [settlement agreement] if the players did not reform a union within thirty days." Wow. The players eagerly complied, but in exchange the NFL agreed to waive its antitrust defenses after any future NFLPA decertification. And so the same cycle is preserved for the next labor dispute.

So here is the bottom line. The players get to choose whether and when they bargain under either the labor or the antitrust law. Their best strategy is to first denounce standard business practices under the antitrust law and then reinstate them under the labor law once peace returns. Holding all the cards, they keep a lion’s share of the pie.

Without a doubt, collective bargaining works badly with both public and private unions, as the Wisconsin saga so clearly demonstrates. But if that system governs NFL labor relations, the players should be barred by statute from using the antitrust law to get their way, by hypocritically denouncing a set of antitrust violations that promptly become the heart of their next lucrative labor agreement.

To stop this charade, Congress should today take the modest step of passing legislation that legalizes all the standard practices now embodied in the NFL labor agreements, denying players the antitrust advantage through decertification. That recalibration leaves them no worse off than any other labor union that deals with a unitary employer.

Indeed, it can be argued that even that first step leaves players in far too strong a position. Players know that salaries could be slashed under the older "reserve clause" regime that forced them to negotiate within the league only with the team that signed them. But if salaries were lower, the league would also prove more stable, because no outsized salary demands from an individual star could shut the NFL down. Remember that baseball did not close its doors the years that Babe Ruth and Joe DiMaggio held out for more money.

That institutional stability has real positive external effects that both the present labor and antitrust laws ignore. Right now, the breakdown in negotiations works a real hardship on fans, hot dog vendors, groundskeepers, restaurants, newspapers, and broadcasters whose livelihood depends on having a season. And for what? The irony here is that the only thing that is worse socially than a monopoly among team owners is a bilateral monopoly in which team owners are forced to share their gains with the players. In today’s intellectual climate, there’s no chance whatsoever of going back to those good old days.

Nor is there, I might add, any chance of forcing a split up of the NFL’s two conferences, the AFC and the NFC , which would lead to the best of all worlds: measures to assure parity within leagues, and competition between leagues. The players give up their unions in favor of a choice between teams in two leagues. The management gives up its solid front in favor of labor peace. The rest of us can still watch a Super Bowl at the end of the season, with a special antitrust exemption. It may be too much to ask in the current milieu, which prefers the use of what the late John Kenneth Galbraith used to call countervailing powers.

Short of this fanciful transformation, what should be done right now is to harmonize the labor law and the antitrust law to stop the current football merry-go-round brought about by systematic decertification? Let the laws be reconfigured in ways that recognize that first-rate competition on the field requires managed competition at the negotiating table. At that point management and labor will be less likely to use old-fashioned methods to do each other in.