The Draft: America’s Favorite Antitrust Violation?

This summer basketball fans flocked to ESPN to watch Paolo Banchero walk the stage as the #1 overall pick by the Orlando Magic in the 2022 NBA Draft. The NFL Draft, which routinely takes place every April, has become a three-day television spectacle drawing millions of viewers. And the 20-round MLB Draft appeals to baseball diehards hoping their team selects their favorite high school or college prospect. Each draft is unique with its own set of quirks. But make no mistake about it ­– the draft has become engrained in the American sports fabric.

Professional sports are different than any other business.

Emotion and fandom often blur the reality that professional leagues are made up of employer-employee relationships. The passion and intensity allow sports to act as an escape from the traditional business world. But when you begin to shine a light on traditional sports constructs, such as the draft, you might not like what you find. Just because the draft is an accepted piece of professional sports, doesn’t mean it passes muster under a strict interpretation of labor law.

The draft is a giant antitrust violation that we’ve all grown to love.

Antitrust laws are put in place to promote competition and protect consumers from large ever-growing monopolies. A major piece of federal antitrust legislation, the Sherman Antitrust Act, states that “every contract . . . in restraint of trade or commerce among the several states or foreign nations, is declared to be illegal.”

Simply put, if two interstate parties agree to something that unreasonably restrains trade because of the anti-competitive nature of the deal, this violates the Sherman Antitrust Act. An open and shut violation would be price fixing among competitors to ensure profits. Mcdonald's and Burger King can’t conspire to simultaneously raise the price of a hamburger to collectively stuff their pockets.

The draft, as exciting a television product as it may be, restrains trade on players entering professional leagues. The draftees don’t have the option of selling their talents on the open market and seeking the highest bidder, and they also have very little say in the team that selects them and the contract they sign.

Paolo Banchero will sign a multi-year deal worth over $12 million per year with the Orlando Magic. Banchero is a tough subject to gather sympathy for, but if he were to hit traditional free agency, he would likely sign for much more money in a location he desired. Unless he secretly loves Disney World, Banchero likely would be going somewhere other than Orlando. The draft suppresses his value and chooses his destination for him. [1]

The draft is formalized in a collective bargaining agreement (CBA) between leagues and players’ associations. Courts encourage CBA negotiations over terms of labor to prevent antitrust litigation. From the court's perspective, let the parties figure it out during negotiations so they don’t flood the court systems. In developing the “non-statutory labor exemption”, courts refuse to allow antitrust claims over terms of employment when employers and employees have agreed to a CBA in good faith. This exemption allows parties to settle their differences at the bargaining table. If the result of the negotiations would normally be considered a restraint of trade, well shame on you, you shouldn’t have agreed to it during negotiations.

The draft, along with free agency and other collectively bargained constructs play an important role in how professional sports operate. The goal of a draft is to ensure competitive balance, granting bad teams the “top prize” of selecting the best prospect to join their franchise. The draft also allows leagues to allot salaries of players entering the league, so veterans can seek more on the open market because draftees are making less. As a result, CBA negotiations start at the baseline level that the draft is accepted to support the sports ecosystem. It would be difficult, if not impossible, for a players’ union to take a hard stance against the draft during future negotiations. So, while the draft is technically collectively bargained, it's unlikely to change during negotiations anytime soon.

To qualify under the non-statutory labor exemption (which the draft currently does), leagues must prove 3 things: [2]

1. the restraint of trade only affects parties to the collective bargaining agreement

2. the restraint is a mandatory subject of collective bargaining

3. the collective bargaining agreement is the product of arms-length bargaining
   

At a quick glance, the draft passes all three tests. The draft falls within the CBA, which is negotiated fairly between players’ unions and leagues. However, a former Ohio State running back made a compelling case that point #1 was not met by the NFL when challenging the draft in court.

After a groundbreaking freshman season and spending his entire sophomore season suspended, Maurice Clarett looked to enter the NFL Draft in 2004. However, the CBA and NFL Constitution prevented anyone who didn’t complete three football seasons after they graduated high school from enrolling in the draft and entering the NFL. Clarett sued the NFL, claiming that the draft was an antitrust violation. In his lawsuit, Clarett touched on many of the anti-competitive points raised above. The NFL countered by claiming the draft is free from antitrust scrutiny because it qualifies for the non-statutory labor exemption.

The lawsuit was heard by the 2nd Circuit and hinged on one simple question: were prospective players like Clarett who were trying to enter the NFL parties to the collective bargaining agreement?

At the time of the lawsuit, the controlling NFL CBA was enacted in 1993 – when Clarett was in 5th grade.

Despite this, the 2nd Circuit found that individuals entering a union are subject to the negotiations of the union prior to their entry. Clarett was subject to the negotiations that took place as he was playing flag football.

But that still doesn’t solve the main issue at hand.

The NFL CBA prohibited Clarett from entering the NFL, joining the players’ union, and becoming subject to the CBA.

Yet inexplicably, the court found that the draft still only affects parties subject to the CBA. Essentially, the draft restricting Clarett from becoming a party to the CBA, ensured that the CBA is affecting only parties subject to the agreement. [3] If your head hurts, you aren’t alone. The NFL convinced the court of this circular logic.

The reasoning was complicated, but the result was simple: the draft was upheld and Clarett had to abide by the NFL rules and couldn’t enter the NFL draft for another year.

To recap: the draft (almost certainly) is a restraint against trade. But because the draft is collectively bargained between players’ unions and leagues, it falls within the non-statutory labor exemption and thus is free from court action. However, to qualify for this exemption, the draft must only affect parties to the CBA. It’s been determined that a player like Paolo Banchero, whose pathway to joining the league is through the draft, is a party to the CBA. Courts have even taken that one step further by declaring that players that are ineligible from the draft because of CBA rules don’t destroy the non-statutory labor exemption.

The four American major sports leagues benefit from the labor law framework in which the draft is viewed by courts. As long as it qualifies for the non-statutory labor exemption, the draft is free from legal scrutiny. And good news sports fans, it doesn’t seem like the draft is going anywhere anytime soon.

Matt Netti is a 2021 graduate from Northeastern University School of Law. He currently works as an attorney fellow at the Office of the General Counsel for Northeastern University. You can follow him on Twitter and Instagram @MattNettiMN and find him on Linkedin at https://www.linkedin.com/in/matthew-netti-ba5787a3/. You can find all his work at www.mattnetti.com

[1] Trevor Brown, Is the NFL Draft Illegal, SLA Blog, (last visited Jul. 18, 2022) https://blog.sportslaw.org/posts/is-the-nfl-draft-illegal/.

[2] Chelsea Janes, Senate committee appears to revisit MLB’s antitrust exemption, The Washington Post (June 28, 2022) https://www.washingtonpost.com/sports/2022/06/28/mlb-antitrust-exemption-congress-letter/.

[3] Clarett v. Nat’l Football League, 369 F.3d 124 (2d Cir. 2004).