Details of the Merger
Golf fans and professional golfers alike were shocked by the news in early June that the PGA Tour (“PGA”) would be merging with the newly founded LIV Golf League (“LIV”) after disparaging each other over the two-year lifecycle of LIV. In a dramatic change of heart, the two tours announced they would be merging, with the nonprofit PGA retaining full control over its tournaments, and its commercial and business rights being rolled into a new for-profit entity which would own LIV and the European (DP World) Tour.
As with any high-profile merger, questions of compliance with the Clayton Antitrust Act of 1914 (the “Clayton Antitrust Act”) quickly arose. Section Seven of the Clayton Antitrust Act prohibits mergers and acquisitions where the result is less market competition.
The Federal Trade Commission (the “FTC”) and the Antitrust Division of the United States Department of Justice (the “DOJ”) enforce the provisions of the Clayton Antitrust Act. The DOJ has been actively challenging proposed mergers recently such as American Airlines and JetBlue, Microsoft and Activision-Blizzard, and Google’s search engine. It is unlikely that the DOJ would pass up the opportunity to take another bite at the apple.
History of the PGA & Antitrust.
The PGA for decades held a monopoly position over professional golf in the United States, and largely the world, up until the formation of LIV which is backed by the Saudi Arabia’s Public Investment Fund and CEO major champion Greg Norman.
The PGA is no stranger to antitrust controversy. In the early 1990s, following a four-year long investigation, attorneys for the FTC determined that two PGA Tour policies violated antitrust laws and recommended government action. The investigation and accompanying recommendation died in Congress partly due to a multimillion-dollar lobbying campaign by the PGA. More recently, the PGA was sued on antitrust grounds by Phil Mickelson and several other LIV players who were banned from playing in PGA events.
Questions of Antitrust Infringement.
Members of Congress, legal scholars, and federal enforcers have been exploring whether the two leagues establishing a new for-profit entity would violate the Clayton Antitrust Act. The Clayton Antitrust Act forbids mergers when the effect which may be substantially to lessen competition, or effectively to create a monopoly. The PGA/LIV merger is what is known as a two-to-one merger, meaning that it would shrink an already concentrated market from being controlled by just two companies to one—a presumptive monopoly. The very kind of merger the Clayton Antitrust Act was implemented to prevent.
The Justice Department along with antitrust enforcers in the European Union (due to the involvement of the European (DP World) Tour) will evaluate whether the new entity would effectively stifle innovation and benefits to consumers.
Jay Monahan, the Commissioner of the PGA, has already described the agreement as intended to eliminate a competitor, an implicit violation of antitrust laws: “I felt very good about the changes we’ve made and the position that we were in, but ultimately, to take the competitor off the board—to have them exist as a partner, not an owner—and for us to be able to control the direction going forwards.”
The last time two leagues of a similar sport became one dominant entity was in 1966, when the American Football League merged with the National Football League. This alleged violation of antitrust laws required Congress to pass a special exemption to the Clayton Antitrust Act to let the deal through.
Jay Monahan and LIV representatives have previously described the deal as the creation of a new business entity, not a conventional merger. An argument that would likely not go a long way with the DOJ as the result is still a one-firm market. Another defense to antitrust allegations is the financial instability of one of the businesses. If one of the businesses is going to fail anyway, and effectively create a monopoly, there is less incentive for the DOJ to prevent the merger. This is known as the “failing firm defense”. The PGA could argue they were failing financially due to the LIV poaching their players, and if they did not do the deal they would go out of business. LIV could also make a similar defense, in their lack of viewership and revenue as compared to the PGA. However, it is widely known how deep the pockets of LIV are. Additionally, although the PGA had to cough up additional cash in the form of larger purses this year, they are not exactly strapped for cash either. Merely losing money is not a defense to an antitrust claim.
The large player contracts touted by LIV prompted the PGA to respond with larger purses of its own through elevated events. Since the formation of LIV, there has been increased competition in streaming and broadcast rights for these golf events. Both real-world examples of competition leading to increased compensation for workers and a better product for consumers, the very benefits the Clayton Antitrust Act was implemented for.
It will be interesting to see how a DOJ who has recently been eager to flex its muscles will act as the details of the merger finalize, and how the courts who have been lenient in recent instances of antitrust litigation will rule.