The PGA TOUR (“Tour”) has decided to do an about-face that is surrounded by controversy. The Tour’s commissioner, Jay Monahan, has been at the center of the debate due to his zero-tolerance stance for LIV Golf (“LIV”). In June of 2023, the world of golf spun into a frenzy due to the rumblings of, and eventual admission of, the intended merger between the Tour, LIV, and DP World Tour.
The raging debates on morality, hypocrisy, money, and sportswashing are entertaining, but the real issue emerges as to whether the merger will be permitted. Lawsuits between the Tour and LIV have ensued over the past year prior to the proposed merger. The Department of Justice (“DOJ”) has not simply forgotten about these lawsuits and moved on from all of the allegations, so it will likely take several months or years before the merger transaction is complete.
This blog examines the legal challenges that arise under antitrust law from the proposed merger and the Tour’s desire to maintain its 501(c)(6) status, which allows it to operate as a business league that may qualify for an exemption under the Internal Revenue Code.
A Brief History of Sports League Mergers
It would appear as though the rationale behind the National Football League (“NFL”), the National Basketball Association (“NBA”), and the National Hockey League (“NHL”) merging with the competition was to absorb some of the teams for each respective sport into their leagues in an attempt to strengthen their league and lessen the potential of strong competition. These organizations likely chose this strategy to (1) avoid disbandment of the less stable organization, (2) increase profits, viewership, talent pools, etc., of the larger organization, and (3) decrease the competition between the organizations. (Click here for a brief history of American sports mergers.)
These sports were only some of the first to have issues of competition with other leagues. Major League Baseball’s (“MLB”) antitrust exemptions were created when the U.S. Supreme Court ruled that baseball is not interstate commerce in Federal Baseball v. National League. The MLB received exemptions from the Sherman Antitrust Act but was still subject to price fixing and other anti-competitive practices. At the time, the National League (“NL”) and the American League (“AL”) had been fierce competitors until they opted to sign an agreement to work together and both acknowledged the other as a major league. Like the Tour and LIV, these organizations determined that they were better together than apart.
The antitrust exemption allowed for a reserve clause that did not permit players to seek employment as they chose. The reserve clause began as a way for baseball’s NL teams to retain players without competition from other teams through an agreement allowing teams to “reserve” five players in a strategy to keep player salaries down. Later, it became an anti-competitive technique that allowed teams to “reserve” their entire rosters. Curt Flood, a center fielder for the St. Louis Cardinals, challenged this technique when being traded to the Philadelphia Phillies, arguing that baseball’s reserve clause violated antitrust law. In Flood v. Kuhn, the U.S. Supreme Court made it clear that baseball had become a sport involved in interstate commerce via television broadcasting deals and other pecuniary gains while specifying that the Court must adhere to stare decisis and that congressional inaction has not yet remedied the issue. The Court’s decision preserved the reserve clause.
Congress finally acted and passed The Flood Act of 1998. It partially, but not entirely, repealed the antitrust exemption and brought about more prevalent collective bargaining issues. Now, MLB players can negotiate with other teams.
Today, the MLB is a part of the “big five” sports leagues (MLB, NBA, NFL, NHL, and Major League Soccer). Much of the revenues are based upon the broadcasting deals made by the leagues. A portion of the revenue generated goes back to player salaries. MLB and the other leagues have created a broadcasting blueprint for professional sports. Separating the Tour, LIV, and DP World Tour, there would be an arguable decrease in revenues and player salaries. The split between the Tour and LIV may not be sustainable. The Tour will likely benefit from the return of major players and a cash influx. At the same time, LIV will likely gain the notoriety it seeks from American and European viewership.
The DOJ started a review of the anti-competitive practices of the Tour as alleged by LIV. This probe began during the summer of 2022. After announcing the Tour and LIV merger, United States Senators Elizabeth Warren and Ron Wyden called for “serious and urgent attention by U.S. antitrust agencies” and that those agencies “closely scrutinize the proposed deal.”
The antitrust allegations are the major uphill battle this proposed merger will face. First, Section 1 of the Sherman Act criminalizes any action that creates restraints on trade or commerce. By combining the three tours, the Tour and Saudi Arabia’s Public Investment Fund (“PIF”) would become the controlling entity of golfers within the United States. This implication means that the Tour and PIF would control player contracts, purses, television rights, and all other aspects of the game.
Next, Section 2 of the Sherman Act makes it illegal to monopolize trade or commerce. In one of its claims, LIV argued that the Tour was a monopoly that fueled anti-competitive interests for players. This argument may be used against this hopeful merger as LIV now attempts to make a pivot on those claims. The Tour has also made public statements alluding to the removal of competition between the two organizations that can be used against the merger's legality. The announcement has attempted to avoid the word merger, but the proposed merger is still enough to face scrutiny from the DOJ.
Section 7 of the Clayton Act prohibits anti-competitive mergers and acquisitions that create a monopoly. Under the Clayton Act, a company may acquire another company that is in imminent danger of failing to minimize the impact on the market rather than the assets leaving the market entirely. This refers to the failing company defense (a/k/a the failing firm defense). The Tour could use the failing company defense in the context of an antitrust lawsuit if it were to complete a merger, but this depends on several factors. The failing company defense is an argument used in antitrust cases, suggesting that a merger or acquisition should not be considered anti-competitive if one of the companies involved is on the brink of failure. The Tour would have to prove (1) imminent failure of LIV, (2) no other reasonable alternative, such as reorganization under Chapter 11 or other purchasers, and (3) less competitive harm via the merger with LIV than with another purchaser.
However, it's crucial to note that the failing company defense is difficult to assert successfully in court. Courts are quite scrupulous in examining such claims to ensure they are not just a way to bypass antitrust laws. Also, the specific circumstances surrounding the Tour and LIV, like their financial status and their positions in the market, would likely be pivotal in determining the applicability and effectiveness of this defense.
The Tour’s 501(c)(6) Status
One implication that is less discussed than the antitrust issues is that of the Tour asserting that it would maintain its 501(c)(6) status. With such a large – and likely profitable – merger, the claim that the Tour should maintain that status may be difficult to assert. As billions of dollars will become accessible in this venture and all television rights will belong to the new entity, revenues should increase. To continue with the assertion that the entity is “not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual” will require the Tour to meet the organizational test and demonstrate that that activities conducted are entitled to exemption.
The Tour has proven resourceful in maintaining its 501(c)(6) status despite those in opposition. As a 501(c)(6) organization, the Tour has the ability to engage in unlimited lobbying efforts. This factor, in combination with the lobbying power of larger sports leagues with the same designation, has a weighty impact on any legislation that is or is not passed, as evidenced in the removal of the “Repeal of Tax-Exempt Status for Professional Sports Leagues” in the Senate’s 2017 tax reform bill.
After announcing the proposed merger, Congressman John Garamendi introduced the No Corporate Tax Exemption for Professional Sports Act. This bill would require that sports leagues that make more than $100 million in corporate income be taxed on their income. Another bill, proposed by Senate Finance Committee Chairman Ron Wyden (D-Ore.), was introduced the following month. This bill, The Sports League Tax-Exempt Status Limitation Act, was proposed to exclude sports organizations with assets in excess of $500 million from being tax-exempt. The Tour would be directly impacted as it currently holds over $3 billion in gross assets. Many critics are against this, but the Tour and other tax-exempt sports leagues currently adhere to the IRS Tax Code.
Fans want to see their favorite players competing against one another in the biggest championships. Golf is unique and differs from the big five insofar as the individuals compete, whereas the “big five” consists of competing teams. It’s been argued that viewership would be a much more tedious task for fans to follow their favorite players in tournaments between the three tours, leading to decreased fan interest and profits for the respective tours.
As tensions continue to rise around this global merger and legal implications are reviewed, fans can simply hope for some great golf.
By: Dwan L. Samuel
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