Competition Bureau Concludes Examination into National Hockey League Franchise Ownership Transfer and Relocation Policies
March 31, 2008
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As a result of media reports, the Competition Bureau (the "Bureau") commenced an inquiry on June 14, 2007 to determine whether the National Hockey League's ("NHL") policies for the approval of transfers of ownership and relocation of franchises were in violation of the Competition Act (the "Act"). In particular, the inquiry focused upon whether the NHL's policies as applied to the attempted acquisition of the Nashville Predators by Mr. James Balsillie constituted a practice of anti‑competitive acts that lessened or prevented competition substantially in a relevant market, contrary to section 79 of the Act. This Backgrounder summarizes the main findings of the Bureau in respect of this matter.
Readers should exercise caution in interpreting the Bureau's assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in this backgrounder are specific to the present matter and are not binding on the Commissioner of Competition (the "Commissioner"). The legal requirements of section 29 of the Act and the Bureau's policies and practices regarding the treatment of confidential information limit its ability to disclose certain information obtained during the course of an inquiry.
Summary of the Bureau's findings
In summary, the Bureau found that the NHL and its individual members did not engage in conduct that is reviewable under section 79 of the Act. As described in greater detail below, the Bureau recognizes that properly circumscribed restrictions on the relocation of sports franchises imposed by the NHL and other professional sports leagues serve legitimate interests, such as preserving rivalries between teams, attracting a broader audience, providing new franchises with an opportunity to succeed and encouraging investment in sports facilities and related infrastructure by local municipalities. The Bureau concluded that the policies implemented by the NHL were in furtherance of such legitimate objectives and did not constitute a practice of anticompetitive acts. Further, in respect of the proposed acquisition by Mr. Balsillie, the Bureau did not find evidence that the NHL's conduct was undertaken for the purpose of preventing competition or for any other anticompetitive purpose. Moreover, as described below, the Bureau is satisfied that that NHL's policies and procedures regarding the process that would be applicable to any future attempts to relocate NHL franchises to Southern Ontario do not give rise to concerns under the Act.
Abuse of dominance
The Bureau examined the issues relating to the NHL's policies for the approval of transfers of ownership and relocation of franchises under the abuse of dominance provisions of the Act, which address conduct by firms holding a dominant position that are likely to have a significant anticompetitive effect. Subsection 79(1) sets out three essential elements that must be satisfied before the Competition Tribunal (the "Tribunal") may issue a remedy in respect of an abuse of dominance. The Tribunal must find that:
- one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business;
- that person or those persons have engaged in or are engaging in a practice of anti‑competitive acts; and
- the practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market.
Any case brought forward by the Bureau under the abuse of dominance provisions must satisfy each of the three elements listed above. The Bureau concluded in this case that the NHL had not engaged in a practice of anti‑competitive acts for the purpose of paragraph 79(1)(b) of the Act and therefore, did not consider the remaining elements of subsection 79(1), such as the appropriate definition of the relevant market.
Investigation by the Bureau
The Bureau conducted interviews and obtained relevant records, including emails and letters, from numerous parties, such as prospective purchasers and vendors of NHL franchises, NHL governors and senior NHL officials, for the purpose of examining the policies applied by the NHL and determining the circumstances surrounding the proposed acquisition of the Nashville Predators. In addition, the Bureau considered the circumstances relating to an earlier attempt by Mr. Balsillie to purchase the Pittsburgh Penguins franchise in 2006. The Bureau also consulted the NHL's Constitution, By‑Laws and applicable policies in order to gain a greater understanding of the processes applicable to requests for transfers of ownership or relocation of NHL franchises.
Ownership and relocation policies of professional sports leagues
Professional sports leagues must promote collaboration among league members while, at the same time, encouraging an atmosphere of competition and rivalry between teams. In the context of the NHL, franchise and league revenues are determined by a variety of shared interests, including the investment of capital by owners, the quality of franchises and games, local community support (both private and public) and television coverage. In addition to the revenues each team generates, the league derives additional value by selling franchises, merchandising, negotiating television and other media rights, and through a variety of other efforts aimed at ensuring the overall maintenance and growth of the league, which is, in turn, inseparable from franchise value.
For a professional sports league to be successful, it must have the capacity to exercise certain rights and powers over individual franchises, including final determination as to who may own a franchise and where it can be located. Properly circumscribed restrictions on the location of a franchise can serve a number of legitimate interests of the league; such as:
- creating and enhancing spectator interest by preserving traditional team rivalries and fostering the development of new ones;
- encouraging investment by private parties and municipalities in arena construction and related infrastructure;
- respecting the investment made by private parties in the supply of refreshments, parking, transportation, and team and league paraphernalia relating to the franchise;
- attracting spectators and corporate sponsors by showing a strong commitment to a local market and the league as a whole;
- ensuring that the sport is being appropriately promoted and that the reputation and goodwill of the league and its individual teams are not being compromised; and
- maximizing revenues generated by the league in the form of television and media coverage rights by promoting the overall stability of the franchises that constitute the league and creating an appropriate regional balance to ensure that the greatest number of spectators is reached.
Sports leagues have attracted competition scrutiny in a number of jurisdictions, including the United States and European Community. For example, U.S. courts have considered claims by prospective owners seeking to acquire control of a professional sports franchise and claims by teams seeking to relocate a franchiseFootnote 1. These courts have upheld the right of sports leagues to determine who will be allowed to own a franchise and have also recognized that properly circumscribed restrictions on the relocation of professional sports franchises are valid.
Ownership and relocation policies of the NHL
The need for a fair and predictable process for consideration of ownership transfer and team relocation applications is a means to ensure that legitimate league interests govern such decisions. The Bureau's inquiry focused upon the ownership transfer and relocation policies of the NHL and the application of these policies in the particular circumstances of the proposed Nashville Predators transaction. In short, the Bureau found that, in the present circumstances, the NHL policies were not applied in furtherance of a predatory, exclusionary or disciplinary purpose. Rather, such policies were implemented in furtherance of the legitimate business interests of the NHL.
(a) Requests for transfers of ownership
The Bureau examined the policies and procedures applied by the NHL in considering requests for transfers of ownership of an NHL franchise. In broad terms, transfer of ownership requests are considered by the NHL Board of Governors in accordance with the Bylaws of the NHL. Of these policies and procedures, the Bureau focused primarily on the seven‑year non‑relocation covenant that may be contained in the Consent Agreement that prospective owners enter into with the NHL. This covenant, where applicable, commits the owner not to seek to relocate the franchise for a period of seven year from the date of the agreement.
The Bureau's review of prior Consent Agreements and interviews with industry participants disclosed that such a non‑relocation covenant has been applied by the NHL in numerous prior transactions involving NHL franchises. A non‑relocation covenant may be in furtherance of legitimate league interests, such as assuring spectators, corporate sponsors, municipalities and others that the owner is committed to the success of the franchise within its existing local territory. The Bureau determined that a non‑relocation covenant would not raise concerns under the Act where the predominant purpose of such a covenant is not to limit or prevent competition, but to ensure that the owner is committed to promoting the franchise within the local community. In addition, under the NHL's procedures, owners of a franchise may seek to have the seven‑year non‑relocation covenant waived or varied at some later date. In assessing the propriety of a non‑relocation covenant, the Bureau will consider all the relevant facts and circumstances and may have concerns where it concludes that in the circumstances, a non‑relocation covenant was directed at preventing competition or was not directed toward achieving legitimate business interests. Further, to secure a remedy, all of the elements of subsection 79(1) would have to be satisfied, including that the non‑relocation covenant would result in a substantial lessening of competition.
(b) Requests for relocations of franchises
The Bureau also examined the policies and procedures applied by the NHL in considering requests for the relocations of a franchise. In the Bureau's view, these policies and procedures appropriately reflect the NHL's legitimate concern that franchises should only be relocated in extraordinary circumstances. In broad terms, requests for the relocation of a franchise are considered by the NHL Board of Governors in accordance with the Bylaws of the NHL. The Bureau understands that applications for relocation of NHL franchises are considered as a last resort when a team is no longer financially viable in its present location or is unable to secure appropriate arrangements for arena facilities. As outlined in greater detail above, restrictions on the relocation of a franchise can serve a number of legitimate interests of the league; including, ensuring spectator interest by preserving traditional team rivalries and encouraging investment by municipalities in arena construction and related infrastructure.
The Bureau found no instance where a "veto" was exercised by an incumbent team to protect its local territory from entry by a competing franchise. Since at least 1993, no franchise has been permitted to exercise a veto to prevent a team from entering into its local territory. Further, under the NHL's rules and procedures, in respect of the proposed relocation of a franchise to Southern Ontario, the NHL would not permit any single team to exercise a veto, but would only require a majority vote. The Bureau may have concerns under the Act if a single team were entitled to exercise a veto to prevent a franchise from entering into its local region within Canada, but such concerns would have to be evaluated having regard to the facts and law applicable at the time such an event occurred.
Proposed acquisition of predators
In the Bureau's view, the facts do not establish that the NHL or any of its representatives interfered with or otherwise obstructed the potential sale of the Nashville Predators Franchise for the purpose of lessening or preventing competition. The NHL was consistently of the view that the Nashville Predators Franchise should not be relocated at this time, irrespective of where the Franchise would be relocated. For the reasons discussed above, the NHL had a legitimate interest in ensuring that the Predators Franchise is successful in Nashville and that any prospective purchaser continued, at least for the near term, to attempt to succeed in Nashville.
Overall, the Bureau does not consider the restrictions on transfers of ownership or the relocation of franchises as applied by the NHL in the present matter to constitute a practice of anti‑competitive acts for the purpose of section 79 of the Act. The Bureau found that in the present circumstances, the NHL's policies were not implemented with an intended predatory, exclusionary or disciplinary purpose. Rather, such policies were applied in furtherance of the legitimate business interests of the NHL as discussed above.
For more information on the Bureau's role and activities, please visit the Bureau's website at www.competitionbureau.gc.ca.
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