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Friday, October 20, 2006
 
The Russians are coming! The Russians are coming!

Each month there is a new development regarding the Penguins' signing of Russian phenom, Evgeni Malkin (See my Sept. 18 post and my Aug. 17 post). In the latest development, the Russian team Metallurg Magnitogorsk filed an antitrust lawsuit in U.S. District Court in Manhattan on Thursday against the NHL and the Pittsburgh Penguins. Here are some of the allegations made by the Metallurg according to the press release:
  • The signing of Malkin to an NHL contract was a "blatant and deliberate tampering and interference" with the Russian team's existing agreement. The Penguins knew or should have known that Malkin was under contract to a Russian team when they signed him.

  • The NHL and the Penguins violated antitrust laws by conspiring in a group boycott and refusing to deal with Russian hockey clubs regarding player transfers. The NHL and its clubs have "decided to play hardball" with Russian hockey clubs to punish them for the Russian Ice Hockey Federation's rejection of a new general agreement governing the transfer of foreign players to the NHL, and that the NHL told its clubs that they were free to sign NHL contracts with Russian hockey players already under contract with Russian hockey clubs if the players secured releases according to Russian labor law.
The first allegation sounds like the Metallurg is asserting a claim of intentional interference with contractual relations against the Penguins, which I previously discussed the merits of in my prior posts.

The antitrust claim, however, is creative. Section 1 of the Sherman Act makes unlawful agreements to restrain trade. When the league enacts a rule or makes a direction, it's deemed an agreement among all of the member clubs for purposes of Section 1. If the press release is accurate that the Metallurg is alleging that the NHL told the clubs they could sign Russian players if the players secured releases, then I don't see a Section 1 antitrust problem because the NHL is essentially saying to the clubs, first make sure that the players are not bound to a contract with another team under Russian law. In other words, there is no agreement to restrain trade. All you really have here are individual NHL teams taking the initiative on their own to negotiate and sign players to contracts.

The Metallurg could also be asserting a Section 2 claim, which makes it unlawful to monopolize or to attempt to monopolize. Section 2 claims are very difficult to establish. Here, the fact that the NHL and the Russian hockey league were unable to reach a transfer agreement is probably not sufficient. Moreover, the Russian hockey league is not a fledgling league trying to compete with the NHL in the U.S. -- it's a well-established league in another huge country that arguably competes with the NHL for Russian players. The fact that the NHL may have more money and is able to draw the top talent doesn't make for an antitrust violation. On the other hand, it could be argued that the NHL has a "natural monopoly" in the U.S. and, therefore, its conduct in dealing with competitors is going to be more heavily scrutinized. But regardless, if the NHL negotiated a transfer agreement in good faith, the Metallurg should definitely lose on Section 2.

Geoff Rapp brought to my attention that there was another lawsuit filed this week, which has not received much press, by the Russian hockey club Lokomotiv Yaroslavl against the NHL, the Calgary Flames and the Edmonton Oilers alleging similar claims involving the signing of Andrei Taratukhin of the Flames and Alexei Mikhnov of the Oilers. So this issue is not going away anytime soon for the NHL. If the NHL loses on summary judgment, I predict settlement (i.e. transfer agreement)....because, as Gary Roberts put it once, "anytime you put an antitrust lawsuit in front of a jury, it's a crapshoot."





16 Comments:

Isn't the Section 1 claim against the NHL based on its refusal to deal with the Russian clubs with respect to transfers of players under contract? It seems there could be a claim here in that the NHL is engaging in a group boycott of Russian clubs. I'd make an analogy to ketchup produces that agree to refuse to deal tomato growers for the first X number of days after the tomato harvest. Then, when the growers are desperate and have to sell because their crop is about to spoil, the ketchup producers can swoop in and get a bargain. The NHL group boycott is eve worse because they've agreed not to negotiate until the players frees himself from his contract, which leaves his team with nothing at all.

You're quite right that it's not an antitrust violation to agree not to negotiate with players under contract, but the claim is that the NHL teams are refusing to deal with the teams that have those players under contract, which is different.

Of course, if the NHL teams were considered a single entity, section 1 would be irrelevant, but we've had that discussion before.

Anonymous PK -- 10/22/2006 3:50 PM  


This comment has been removed by a blog administrator.

Blogger Rick Karcher -- 10/22/2006 4:53 PM  


PK,

Thanks for the comment. Your ketchup example is definitely a violation of Section 1. But this is different because the Russian hockey league, unlike your tomato growers, is in competition with the NHL.

So change the facts. Let's say, instead of tomato growers, another ketchup producer sues a group of other ketchup producers claiming a Section 1 violation because those other producers refused to COLLECTIVELY enter an agreement with it regarding the hiring (or non-hiring) of its employees. Let's say that the other producers got together and said, "it doesn't make sense for us all to agree to this because we can legally hire this producer's employees if we want upon the expiration of their employment contracts, and it just doesn't make sense for us economically to do this collectively as this one producer wants us to do." And then after that meeting breaks, one of those ketchup producers (i.e the Penguins) goes and hires one of the plaintiff's (i.e. Metallurg's) employees under an existing employment contract (i.e. Malkin). There's no agreement to restrain trade by the ketchup producers in that situation. And I think that's all that can be said by the NHL not entering into a transfer agreement. But if the NHL told the teams to go solicit and sign Russian players under existing contracts with Russian teams, then you'd have a different case.

While there's an argument that can be made under Section 2, that's a loser as well I think. To me, this is an interference with contractual relations case against the individual NHL teams, and that's it.

Blogger Rick Karcher -- 10/22/2006 4:55 PM  


I think the claim is different than you're describing. The claim is that the NHL teams agreed that they would not collectively negotiate with Russian teams AND they agreed that no individual NHL team would bargain with Russian teams. It's the latter agreement that would be a section 1 violation, not the agreement not to bargain with the Russian clubs as a group.

Oh, and I agree that there clearly seems to be a tortious interference claim here.

Anonymous PK -- 10/22/2006 9:51 PM  


But there's no restraint on trade. In your tomato example, the agreement restricted the grower's ability to sell tomatos. The alleged refusal to negotiate with the Russian hockey league is not restricting the Russian league or teams from competing. The Russian league is not prevented or hindered from competing with the NHL or NHL teams with respect to players already under contract with Russian teams or those that are not under contract.

With respect to those players not bound by contracts with Russian teams, Russian teams compete with the NHL teams over signing those players, which is healthy competition (Russian teams just can't or don't want to pay them as much as NHL teams).

And with respect to those players bound under contract with Russian teams, NHL teams can't legally solicit and sign those players, so why is it an antitrust violation for the NHL to refuse to negotiate a transfer agreement to sign those players? Basically, the Russian league is irritated that the NHL teams are paying their players more money -- that's not a restraint on trade and not a Section 1 antitrust violation. [If anything, maybe the transfer agreement is a restraint on a free market for players' services.] If Russian teams have rights under existing player contracts, it can't be an antitrust violation when a third party refuses to enter an agreement to purchase those assets (that would be terrible precedent). Russian teams can enforce those player contracts against the players and sue third parties for interfering with those contracts.

Blogger Rick Karcher -- 10/23/2006 7:54 AM  


You state: "If Russian teams have rights under existing player contracts, it can't be an antitrust violation when a third party refuses to enter an agreement to purchase those assets (that would be terrible precedent)." Of course that's right, but that's not the claim. The claim is that the NHL teams have agreed among themselves not to allow any individual team to negotiate transfers. So it's not just that a third party won't buy your asset, it's that a group of third parties have collusively decided to engage in a group boycott of your products.

In short, Russian teams have assets - players under contract. The NHL teams have agreed among themselves not to boycott those assets. As a result, the Russian teams are injured.

Anonymous PK -- 10/23/2006 11:32 AM  


Sort of interesting that the Russians didn't file a claim against Malkin's agent (CAA), too, under a tortious interference theory. Wouldn't surprise me if they are added later.

Anonymous john -- 10/23/2006 2:08 PM  


PK,

If true, that would mean that the NHL could never say no to anybody! If I have a truckload of hotdogs and call the NHL to enter an agreement with me for the purchase of my hotdogs by the NHL teams, then the NHL better negotiate or else it's an agreement to restrain trade by the individual teams under Section 1?

John,

You could be right, I hadn't even thought about that.

Blogger Rick Karcher -- 10/23/2006 5:59 PM  


Six comments:

1) can foreign plaintiffs make use of US antitrust law to complain of conduct which is felt abroad? I know that US plaintiffs can use US antitrust laws against extraterritorial conduct and foreign defendants, but might there be a limitation that harm be felt within this country?

2)the NHL is terrified by the prospect that they might be felled by an antitrust suit (as are other professional sports). As a consequence, it tries to settle these cases where possible--as in 1985 with Purina concerning the sale of the St. Louis Blues. What Magnitogorsk is trying to do is to get the NHL to stop flashing the green light to North American agents to use the labor code argument to induce Russians to leave their team mid season.

3)it is true that the NHL is prohibitting its members from negotiating individually with Russian teams, but this is similar to a labor union. The union prohibits its individual members from negotiating directly with management--it would seem that some labor or collective group exemption might apply to the antitrust claim.

4)still, the antitrust claims are only half the game--and as it seems to be are being used just to make the NHL "think about it." The other half of all of this are the individual actions against Mikhnov, Tara-whatever in Calgary, and Malkin, wherein Magnitogorsk is trying to enforce Russian PHL arbitration awards to enjoin their play. This is a question of the New York Convention, and it seems to me--regardless of Daria's past comments--that there is no valid reason from failing to enforce these things. That being said, I think there are grounds for defending these claims, and it is unlikely that Magnitogorsk will get preliminary injunctions on them in the next 30 days. Rather, I think if Berkovich sees this thing through all the way, he can get a permanent injunction for the term of the contracts as in force.

5) I have researched whether the tortious interference claims have merit. I think the NHL will rely on the Kozlov or Samsonov precedents from the late 1990s, where the Red Wings/AHL relied on the claim that they believed their Russian players to have been not under contract, and hence because there was no subjective intent to interfere with valid contractual relations, there could be no tortious intereference. Here there is a more than plausible argument that the Russian labor code article 80, entitles the Russian players to leave upon two weeks notice. With this argument, the teams can claim a good faith basis for their action, and escape liability on this count.

6) with regard to how compelling the article 80 argument is, it should be known there is a pending statutory amendment before the Duma that the labor law (article80) should not apply in the context of the Russian sports law. If the article 80 argument was garbage, why would Russia's parliament be trying to overturn the very loophole it is said to create?

Ben

Anonymous Anonymous -- 10/23/2006 8:43 PM  


Ben:

The labor exemptions to the antitrust laws protect union conduct. Assuming the NHL is not a single entity, they do not have similar protection.

Rick: You must carefully state who is agreeing on what. My claim isn't that the NHL as an organization can't say "Go negotiate with individual teams." That is not the issue. The issue is whether NHL teams can agree among themselves to boycott a product. This is not Russian teams going to "the NHL" whatever that means, and demanding a global transfer agreement. It's a Russian team approaching an NHL team, and that individual NHL team refusing to consider negotiating because of an agreement it has with other NHL teams to boycott the Russian teams products.

Anonymous PK -- 10/23/2006 8:56 PM  


Ben,

Thanks for the comments. The labor exemption is not applicable because the alleged restraint affects a party outside the collective bargaining relationship and the alleged restraint did not arise out of collective bargaining negotiations.

PK,

The complaint alleges that the NHL teams "were directed and instructed that they were free to sign NHL contracts with Russian hockey players under contract with Russian hockey clubs should the Russian hockey players secure 'releases' pursuant to Russian labor law." The complaint also states that the NHL did this in order to play "hardball" when the Russian league and the NHL did not come to terms after good faith negotiations on a transfer agreement.

I just don't see the Section 1 violation. The NHL teams are not required under any law to compensate Russian teams when they sign their players, and without a transfer agreement in place they are not contractually obligated to compensate Russian teams. The only reason NHL teams paid transfer fees in the past is because there used to be a transfer agreement in place between the NHL and Russian hockey league that provided for such fees to be paid. How can there be any problem with the NHL's telling the teams that they don't have to pay or negotiate transfer fees to Russian teams when they are not legally required, or contractually obligated, to do so? All the NHL did was say, "If you're going to sign Russian players, just make sure the players get valid releases from those contracts in accordance with Russian law first."

Blogger Rick Karcher -- 10/23/2006 11:40 PM  


"with regard to how compelling the article 80 argument is, it should be known there is a pending statutory amendment before the Duma that the labor law (article80) should not apply in the context of the Russian sports law."

It has been already withdrawed.
But there is a pending amedmend to the "On phisical culture and sport in the Russian Federation" law, which stipulates a one year (!) walk out notice.

Anonymous daria -- 10/24/2006 3:23 AM  


Rick:

I have not read the complaint. I'm just going off what I've read secondhand. If the complaint merely states that the NHL teams were signing players that may or may not be free agents under Russian law, then I agree there is no Section 1 violation.

Question: Does the NHL team require its teams not to bargain with Russian clubs over players that the Russian team has under contract? If so, that would be the Section 1 violation to which I referred and that is the Section 1 claim the Russian clubs should bring if they can.

Anonymous PK -- 10/24/2006 9:01 AM  


Two threads here:

re Russian law
Regardless of which amendment is being used to fix the loophole existing between the Labor Code and the Sports Law, are we in agreement that a loophole exists nonetheless?

That tomorrow--because of insufficiencies in Russian law--the entire roster of Khimik, Avantgard or whoever, can technically get up, send in letters of resignation, and 14 or 15 days later be in Philadelphia, significantly improving the playoff prospects of the Flyers?

Now regardless of whether this is 100% true or merely "likely," based on this, the NHL (teams) lack the subjective intent to interfere with contracts necessary to give rise to a tortious interference claim. Moreover, with regard to the arbitration awards, this makes their legitimacy more dubious for a US court--I agree though that review on the merits though is not a basis for vacating an arbitration award.

re antitrust
does it make any difference that the plaintiff in this case is foreign and the harm he is claiming is entirely foreign as well? My cursory knowledge of the F. Hoffmann-LaRoche Ltd. v. Empagran S.A. (2004) suggest it does. There the Supreme Court found that victims injured by a worldwide price-fixing conspiracy could not bring suit under U.S. antitrust law because they suffered no injuries dependent on effects on the domestic U.S. market. In this case, no one before the court claims a U.S. injury. Therefore, perhaps the appropriate action might be an antimonopoly suit before a Russian arbitrazh (commercial)court. That being said, perhaps Russian antimonopoly law does not have extraterritorial application. In that case GATT?
Still, if this kind of thing was truly actionable, would it not have happened long ago, involving US Japanese baseball, or European countries in soccer? I think that, while interesting, this [antitrust] case needs to be recognized as merely a pressure tactic by Magnitogorsk, not something that has a legitimate chance at success. The real event is the arbitration enforcement.

Anonymous Anonymous -- 10/24/2006 9:41 AM  


Didn't Empagran deal with no US injury and no US conduct? Here, the conduct - agreements among NHL teams, to the extent such agreements exist - occurred in the US.

Anonymous PK -- 10/24/2006 11:26 AM  


PK,

The answer to your last question is no. I enjoyed the discussion.

Blogger Rick Karcher -- 10/24/2006 11:57 AM  


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