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Dissecting the UFC fighter antitrust lawsuit, part 1

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In a two-part series, Bloody Elbow’s resident economist and former antitrust practitioner takes readers through the complete ins-and-outs of the fighter lawsuit against the UFC.

Mark J. Rebilas-USA TODAY Sports

Two weeks ago we had a big day in MMA with the announcement of the UFC/Reebok sponsorship deal. Now we've got two big days in the span of two weeks as a group of current and former fighters officially filed an antitrust lawsuit against the UFC yesterday under Section 2 of the Sherman Act.

What does it all mean? What's an "exclusionary scheme" to eliminate competition? How do antitrust cases work? How will the case progress? What exactly are the plaintiffs alleging and what will the UFC's defense likely be?

This used to be my wheelhouse. I used to provide expert witness support for antitrust cases involving major companies we interact with on a daily basis. In this two-part series, I'll take you through the answers to some of the above questions and share a few thoughts as someone who knows at least a thing or two about MMA and antitrust.

The first part today will be a general overview of antitrust cases, the broad allegations in this case, the pre-trial procedures to look out for in the coming months (and years) and the arguments antitrust plaintiffs and defendants tend to make in many cases. In the second part tomorrow, I'll take you through the nitty-gritty details of the fighters' allegations against the UFC and the relevant economics involved.

If you've got time to spare, this 7,000 word article by John Nash will help you understand some of the issues regarding the UFC and monopoly/monopsony power.

Overview of Antitrust Cases

Antitrust is a unique area of the law in the sense that it's almost entirely driven by economics. Economic thought shapes antitrust law and its application. This is why there's been a general movement towards more relaxed standards over time. It's not a Republican conspiracy; it's that economists' understanding of how big 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. Follow him @MMAanalytics.