Sullivan v. National Football League

• Citation: 34 F.3d 1091
• Decision Date: 03 May 1994
• Docket Number: No. 94-1031,94-1031
• Parties: 1994-2 Trade Cases P 70,720 William H. SULLIVAN II, Plaintiff-Appellee, v. NATIONAL FOOTBALL LEAGUE, & Members of the National Football League, Defendants-Appellants. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 1091

34 F.3d 1091

1994-2 Trade Cases P 70,720

William H. SULLIVAN II, Plaintiff-Appellee, v. NATIONAL FOOTBALL LEAGUE, & Members of the National Football

League, Defendants-Appellants.

No. 94-1031.

United States Court of Appeals,

First Circuit.

Heard May 3, 1994.

Decided Sept. 16, 1994.

Order Denying Rehearing Oct. 26, 1994.

John Vanderstar, with whom Sonya D. Winner, Ethan M. Posner, Covington & Burling, Washington, DC, Jeremiah T. O'Sullivan, Sarah Chapin Columbia, Choate, Hall & Stewart, Boston, MA, Joseph W. Cotchett, and Cotchett, Illston & Pitre, Burlingame, CA, were on brief, for appellants.

Joseph L. Alioto and Frederick P. Furth, with whom Angela M. Alioto, Law Offices of Joseph L. Alioto, San Francisco, CA, Alan R. Hoffman, Lynch, Brewer, Hoffman & Sands Boston, MA, Bruce J. Wecker, Michael P. Lehmann and Furth, Fahrner & Mason, San Francisco, CA, were on brief, for appellee.

Before TORRUELLA, Chief Judge, COFFIN, Senior Circuit Judge, and STAHL, Circuit Judge.

TORRUELLA, Chief Judge.

The National Football League and twenty-one organizations owning NFL franchises (referred to collectively as the "NFL") appeal the judgment entered against them after a jury found that the NFL violated the antitrust laws by restricting owners of member football clubs from selling shares in their teams to the public. Plaintiff-appellee, William H. Sullivan, former owner of the New England Patriots football team (the "Patriots"), was awarded a total of $51 million in damages for the losses Sullivan incurred when he had to sell the Patriots to a private buyer after the NFL prevented him from offering 49% of the team to the public in the form of publicly traded stock. Because several prejudicial errors were committed during the trial, we vacate the judgment and remand for a new trial.

I. BACKGROUND

Under Article 3.5 of the NFL's constitution and by-laws, three-quarters of the NFL club owners must approve all transfers of ownership interests in an NFL team, other than transfers within a family. In conjunction with this rule is an uncodified policy against the sale of ownership interests in an NFL club to the public through offerings of publicly traded stock. The members, however, retain full authority to approve any given transfer by a three-quarters vote according to Article 3.5.

Sullivan owned the Patriots from the team's inception in 1959 until October of 1988. When Sullivan formed the Patriots, he and his partner sold non-voting shares of the team to the public beginning in 1960. At that time, the Patriots were in the old American Football League ("AFL"), which was separate from the NFL, and which had no policy against public ownership of teams. In 1966, the AFL and the old NFL merged into a single league. Under the terms of the merger, the new NFL would adopt the old NFL's policy against public ownership. The Patriots, however, were allowed to retain their level of public ownership as a special exception to the rule under a grandfather clause.

In 1976, Sullivan sought to acquire the publicly held shares of the Patriots through a merger of the club into a new Sullivan-owned company. Stockholders approved the transfer and the transaction was subsequently consummated, although some shareholders subsequently brought suit, challenging the sufficiency of the purchase price. After protracted litigation, the shareholders obtained a judgment requiring Sullivan to pay them a higher price for their shares. The Patriots then became a fully privately owned club.

Sullivan and his son, Chuck Sullivan, who owned the stadium where the Patriots played, began to experience financial difficulties and increasing debt burdens in the mid-1980s. The Sullivans decided that they needed to raise capital to alleviate their financial problems. After the Boston Celtics professional basketball franchise made a public offering of 40% of the team in December of 1986, the Sullivans decided to pursue a similar deal with the Patriots in order to raise cash to cover some of their debts.

On October 19, 1987, the Sullivans met with Stephens, Inc., a small investment banking firm in Little Rock, Arkansas. They discussed a debt financing deal whereby Stephens would loan the Sullivans $80 million dollars, with half going to the Patriots and the other half to Chuck Sullivan's company which owned the Patriots' stadium. The Patriots' portion of the loan would be repaid out of the proceeds of the sale of 49% of the Patriots through the offering of public stock. Stephens agreed to look into the possibility of arranging the deal, but informed the Sullivans that they would first have to get NFL approval. Sullivan ultimately never obtained NFL approval and the deal with Stephens never progressed beyond some preliminary discussions.

At a meeting of the NFL owners on October 27, 1987, Sullivan raised his stock sale idea with the other owners and asked for a modification of the NFL's policy against public ownership to allow for certain controlled sales of minority interests in NFL clubs. Alternatively, Sullivan requested a waiver from the public ownership policy for his contemplated public offering of the Patriots. Sullivan's request was eventually tabled at this meeting. Discussions continued among the owners and, at one point, Sullivan counted 17 of the 21 owners needed for approval as being in favor of allowing him to make his public offering (seven owners were still undecided). Pete Rozelle, NFL Commissioner at the time, told Sullivans that he was not in favor of Sullivan's proposals and that league approval was "very dubious." Sullivan ultimately never asked for a vote on amending the ownership policy or on waiving the policy for the Patriots, and the NFL never held such a vote. Sullivan claims that he did not ask for a vote because it would have been futile.

In October of 1988, Sullivan sold the Patriots for approximately $83.7 million to KMS Patriots L.P. ("KMS"), a limited partnership owned by Victor Kiam and Francis Murray. Sullivan alleges that, absent the NFL's public ownership policy, he would have been able to retain a majority share of a rapidly appreciating asset with a high potential for future profits. Instead, Sullivan asserts, he was forced to sell the Patriots at a depressed price to private buyers.

On May 16, 1991, Sullivan sued the NFL claiming that, among other things, the NFL had violated the Sherman Anti-trust Act, 15 U.S.C. Secs. 1-2, by preventing him from selling 49% of the Patriots to the public in an equity offering. Sullivan alleged that, as a result, he was forced to sell the entire team to a private buyer at a fire sale price in order to pay off existing debts. Prior to trial, the district court dismissed Sullivan's claim under Sec. 2 of the Sherman Act along with various state law claims. After a trial on Sullivan's claim under Sec. 1 of the Sherman Act, the jury rendered a verdict for Sullivan in the amount of $38 million, which the judge later reduced through remittitur to $17 million. Pursuant to 15 U.S.C. Sec. 15, which provides for treble damages for antitrust violations, the court entered a final judgment for Sullivan of $51 million.

II. ANALYSIS

The NFL has raised a number of issues on appeal concerning the application of Sec. 1 of the Sherman Act to the facts of this case, which, according to the NFL, entitle it to judgment as a matter of law. We address these issues first to see if the present case should be dismissed, and we ultimately conclude that it should not. We next address the NFL's allegations of trial error and we find that several of them require that we overturn the verdict in this case and order a new trial.

The first set of issues involves the district court's denial of the NFL's motions for judgment as a matter of law under Fed.R.Civ.P. 50. We review the court's decision de novo, using the same stringent decisional standards that controlled the district court. Gallagher v. Wilton Enterprises, Inc., 962 F.2d 120, 125 (1st Cir.1992); Hendricks & Assocs., Inc. v. Daewoo Corp., 923 F.2d 209, 214 (1st Cir.1991). Under these standards, judgment for the NFL can only be ordered if the evidence, viewed in the light most favorable to Sullivan, points so strongly and overwhelmingly in favor of the NFL, that a reasonable jury could not have arrived at a verdict for Sullivan. Gallagher, 962 F.2d at 124-25; Hendricks, 923 F.2d at 214.

III. ISSUES ALLEGEDLY REQUIRING JUDGMENT FOR THE NFL

A. Lack of Antitrust Injury

To establish an antitrust violation under Sec. 1 of the Sherman Act, Sullivan must prove that the NFL's public ownership policy is "in restraint of trade." Monahan's Marine, Inc. v. Boston Whaler, Inc., 866 F.2d 525, 526 (1st Cir.1989). Under antitrust law's "rule of reason," the NFL's policy is in restraint of trade if the anticompetitive effects of the policy outweigh the policy's legitimate business justifications. Id. at 526-27 (citing Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723, 108 S.Ct. 1515, 1519, 99 L.Ed.2d 808 (1988)). Anticompetitive effects, more commonly referred to as "injury to competition" or "harm to the competitive process," are usually measured by a reduction in output and an increase in prices in the relevant market. National Collegiate Athletic Ass'n v. Board of Regents of Univ. of Okla., 468 U.S. 85, 104-07, 104 S.Ct. 2948, 2962-63, 82 L.Ed.2d 70 (1984) ("Restrictions on price and output are the paradigmatic examples of restraints of trade") (hereinafter "NCAA "); Chicago Professional Sports Ltd. Partnership v. National Basketball Association, 961 F.2d 667, 670 (7th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 409, 121 L.Ed.2d 334 (1992). Injury to competition has also been described more generally in terms of decreased efficiency in the marketplace which negatively impacts consumers. Town of Concord v. Boston Edison Co., 915 F.2d 17, 21-22 (1st Cir.1990), cert. denied, 499 U.S. 931, 111 S.Ct. 1337, 113 L.Ed.2d 268 (1991); Interface...