What we learned at the UFC antitrust hearings

Written by John S. Nash

Nearly five years after the original complaint was filed, the Le, et al v. Zuffa, LLC antitrust lawsuit entered a Las Vegas Federal court for a week of evidentiary hearings. The case still hasn’t progressed to the trial phase. Instead, we are still waiting to see if it will pass class certification. This was the primary purpose of these hearings: to assist Judge Richard Boulware in his determination if UFC fighters can proceed with a class action.

In order to be a class action lawsuit - a suit in which a smaller group of proposed class representatives file suit on behalf of and represent all members of a defined class - the proposed class has to meet a list of criteria. The class members have to be numerous, their claims depend on common contentions, the class representatives claims are generally typical of other members of the class, and that the class representatives will fairly and adequately protect the interests of the class. In this case, former UFC fighters Cung Le, Jon Fitch, Nate Quarry, Kyle Kingsbury (all four of whom were in attendance at the hearing), Javier Vazquez and Brandon Vera are asking to serve as the Class Representatives for the 1214 UFC fighters they claim as class members. These 1214 fighters share the common traits of having, for the Bout Class, fought in the UFC during the class period (December 16, 2010 through June 30, 2017) while under a Zuffa exclusionary contract, or, for the Identity Class, having their identity rights used or taken during the class period. It is this group that the Plaintiffs accuse Zuffa of having damaged via their “Scheme.”

The Plaintiffs allege that the UFC violated antitrust laws by engaging in a Scheme to maintain and enhance their “(a) monopoly power in the market for promotion of live Elite Professional mixed martial arts bouts, and (b) monopsony power in the market for live Elite Professional MMA Fighter services.” The result of this Scheme, according to the Plaintiffs, was fighters’ pay being suppressed well below what a competitive market would have paid.

Monopoly and Monopsony

The textbook definition of a monopoly is being the sole seller of a product. A monopsony would be the reverse of this: instead of a sole seller, a monopsony is the sole buyer. This includes the buying of services from labor. This is of course the textbook definition, but when monopolies or monopsonies are used when discussing antitrust, it refers to market power, not the textbook definition. So a firm has monopoly or monopsony power not by being the sole buyer or seller, but having such a dominant position in a market as to control the setting of the price.

While the Plaintiffs allege that Zuffa attained both a monopoly and a monopsony, it is the rarer monopsony charge that is the heart of the case. It is via monopsony power that the Plaintiffs allege Zuffa was able to damage fighters by paying them a much lower wage than they would have been paid in a more competitive market.

The Plaintiffs allege that the UFC’s scheme involved using their restrictive, exclusive contracts to remove key, must-have inputs from the other promoters. These inputs are the fighters, especially highly ranked fighters, which they refer to as “Headliners.” As Zuffa foreclosed these inputs, by either signing more top fighters to exclusive UFC contracts or acquiring and closing down competing promotions, such as PRIDE, WFA, WEC, and Strikeforce, they attained more monopsony power and were able to keep the fighters’ wage-share of the revenue relatively low.

As was revealed during the hearings, the UFC’s post-TUF peak for share of revenue going to the fighters was in 2007, when it almost hit 26 percent. After that it dipped to the low 20s for the next few years, then dipped again and leveled off starting around 2011to just under 20 percent. Following the purchase by Endeavor, they forecast that the wage share would stay at 20 percent for the foreseeable future.

This is much lower than what we see with the Major League Sports, where collective bargaining agreements generally set the wage share for the players at around 50 percent. It is also less than what we see in boxing, where evidence was presented that Golden Boy paid 62 percent of their revenue, Warriors paid 65 percent, and Top Rank paid 71 percent of their revenue on average to their boxers. This is also much lower than what rival MMA promoters Strikeforce (63 percent) and Bellator (44.7 percent) were shown to have paid.

Zuffa, in their defense, has noted that their wage share is roughly equivalent to what other sporting entities, such as Major League Soccer, ATP Tour, the US Open, and Canadian Football League, pay their athletes.

During the Class Period (12/16/2010-6/30/2017), Zuffa fighters were paid a total of $626 million. The Plaintiffs’ experts have determined that if the UFC had paid as much as these other sports, the fighters would have earned anywhere from $811 million to $1.6 billion more during the class period.

The defense obviously disagrees with all those claims. They argue that their success was due to their skill as promoters, that their contracts served pro competitive purposes, and that the Plaintiffs’ use of wage share means little, as UFC fighter wage levels rose during the period in absolute terms and were much higher on average than what Bellator or Strikeforce was paying.

Last week’s hearings therefore were to help Judge Boulware wade through these competing arguments before he makes his decision on Class Certification.

The Main Event: Hal Singer vs. Robert Topel

When Judge Boulware ordered these hearings he referred to the three days scheduled for the Plaintiffs’ Expert, Dr. Hal Singer, and the Defendant’s Expert, Dr. Robert Topel, as being the main event, with the other hearings serving as the undercard. This is an apt description for, as the Judge himself acknowledged, the Plaintiffs’ case depends on whether or not the Court accepts Singer’s regression.

Prof. Singer, was brought on to create a model that would show how the UFC attained market power. He used regression analysis to look at a wide range of fixed and independent variables, which, according to the Plaintiffs, demonstrated how Zuffa gained more market power as they foreclosed on other promoters ability to access fighters in the relevant markets.

It goes without saying that the Defendants did not agree with his model. According to Zuffa’s lead attorney, William Isaacson, they did not accept either side of the regression, neither the foreclosure share or the use of wage share.

One thing that was not being debated by the Court, was whether or not Zuffa intended to lock up key fighters and close down competitors. After the Plaintiffs’ attorney began citing internal documents, Deutsche Bank comments, and Zuffa’s own emails that included comments that suggested that was their intent, the Judge cut him off.

“Certainly that’s the intent,” Judge Boulware told Eric Cramer, the Plaintiffs’ attorney. “The question is whether or not they did it. There’s no dispute, unless Mr. Isaacson says otherwise, although I don’t know how he could given all the quotes, that they were trying to do that. The question is have you sufficiently alleged that they did that.”

Wage Share vs. Wage Level

One of the major points of contention is the use of wage share versus wage level. The Defendants oppose the use of wage share, arguing in their Daubert Motion that this would be the first known case where it was used to “measure alleged anticompetitive effect, antitrust injury or damages.” The Plaintiffs counter by citing in their Motion to Oppose Summary Judgement its use in White v. the NCAA, where wage share was used to measure the competitiveness of compensation.

As an example for why he thought using Wage Share was wrong, Prof. Topel gave the example of Chick-fil-A versus Subway fast food workers. According to Topel, the typical Chick-fil-A generates $4.5 million in revenue while the typical Subway generates $500,000 in revenue. Both chains though pay their workers on average $20,000 a year. If we used wage share, then we’d expect the Chick-fil-A worker to be paid nine times as much as the Subway worker, something most people would view as absurd.

The Plaintiffs conceded that for most situations wage level was the appropriate measure, but they claim that MMA is different. With sports in general, but MMA in particular, the athletes are the product. Which means they are the primary driver of revenue gains.

One oddity in Singer’s regression, as pointed out by the Defendant’s, was that a small group of fighters which included the most recognizable names in the sport, showed no damages. In fact, his regression showed they were overpaid. This seems counter to what one would expect if we were focusing on the fighters MRP. (For his part, Singer said he thought these fighters were damaged but that their pay was so far outside the norm his model could not pick it up.)

MRP

The Plaintiff’s argue that only by using Wage Share do we capture what the fighters would be paid if it was closer to the “impossible to measure” Marginal Revenue Product, or MRP, of a fighter.

A simple example of MRP given during the hearing was a tennis player who’s presence meant an additional 20,000 tickets were sold at $25 apiece. Thus her MRP would be $500,000 and the closer she was paid to that amount the less we would say she was being exploited.

The problem for determining fighters MRP is 1) that much of the money generated for events is contractual television or sponsorship money that can’t be assigned to an individual event; 2) how do you determine which fighter or fight amongst the dozen or so bouts on a card is responsible for how much of the revenue generated for that event? The difficulty of measuring individual MRP has led the Plaintiffs to argue that it is best to use wage share as a proxy for the fighters total MRP as a group.

Perhaps one of the strongest moments for the Plantiff was when their attorney, Eric Cramer, questioned Topel about the value of ranked fighters, getting him to agree that, all things being equal, fans prefer fighters that are highly ranked, prefer seeing such highly ranked fighters versus other high ranked fighters, and that such bouts likely generate more revenue for the promoter. In other words pitting highly ranked opponents versus other highly ranked opponents increase their MRP.

Earlier in the hearing, Topel had told the Judge that the wage level can rise, even though the firm has monopsony power (which you’d assume would allow the firm to suppress pay.) The situation Topel was referring to was when production increased, but he left this last bit out, making it sound as if it was a relatively common phenomenon.

Topel’s comments paid off for the Plaintiffs later when Cramer questioned Singer about how Strikeforce fighters wages could have risen when they moved to the UFC while their pay in relation to their MRP had shrunk. As Singer explained it, because the UFC had higher ranked fighters and more of them, the Strikeforce fighters more often than not were limited to what rank they could attain and the rank of the opponent they could face. This made their fights less valuable. Once they migrated to the UFC they could rise higher in the rankings and fight higher ranked fighters - fighters that had been foreclosed to Strikeforce - generating more revenue for the promoter, and increasing their MRP. So while their wage level increased when they moved from Strikeforce to the UFC, it was lower than their increase in MRP.

Zuffa’s explanation for how they and not the fighters were responsible for increases in MRP focused on their unique presentation of events. According to them it was everything they do, including building the brand, their in-house marketing and production, that is much more responsible for the increase in revenues we’ve seen over the years. This was derided as the “special sauce“ by the Plaintiffs.

Foreclosure Share

Another point of contention, which is also a key component of Singer’s regression, is his measure of the Foreclosure Share. This is measured by the number of fighters out of the top 650 ranked fighters in each weight class according to Fightmatrix who are currently signed to Zuffa contracts that are 1) exclusive, 2) 30 months or more in length, and 3) contain a champion’s clause. A narrower, Headliner Foreclosure Rate, measured the rate of top 15 fighters signed to a Zuffa contract.

To demonstrate how much of the market Zuffa had captured, Singer pointed out that in 2010, 34 unique promoters in North America had at least one fighter in the top-15. This was down to only six by 2016.

This Foreclosure Rate is the primary reason given by the Plaintiffs for why Zuffa has managed to attain market power. The Defendants, meanwhile, rejected it. They argued the categories and criteria given were arbitrary, that the fighters were weighted to give better results for the Plaintiffs, and that the contract provisions cited as being anticompetitive are in fact standard in the industry. (For their part the Plaintiffs argued that a contract provision can be legal or illegal depending on whether or not the firm using them has market power or not.)

In what seemed like a major misstep by the Defense, Topel conceded that if the UFC’s contract’s were for perpetuity then the fighters’ situation would resemble that of Major League Baseball during the reserve clause era. After hearing this. two members of the media sitting near me both leaned over to say that it sounded as if he was agreeing with the Plaintiffs’ allegations.

Decision

I have no experience with regression analysis, so will leave judgements as to the merit of Singer’s model to the Paul Gift’s of the world. I will note though that the general consensus seemed to be that Singer “won the hearing.” Whether that matters will be up to the Judge but by all appearances, Singer was more concise in his answers, clearer in his explanations, and more forceful with his rebuttals. In fact, at times he could be described as almost “cocky.”

At one point Singer seemed to be channeling Peter Venkman, when he mocked Zuffa’s concerns that if they changed their business practices, “cats and dogs are going to be friends.” And once finished with his testimony, instead of sitting with the Plaintiffs or their attorneys, he chose to sit next Paul Gift to apparently let him know his critiques of his regression were wrong.

The Co-Main Event: Zimbalist vs. Blair

With Joe Silva’s hearing canceled, the Dr. Andrew Zimbalist vs. Dr. Roger Blair hearing was moved up to the co-main. Originally, I assumed their day would be an afterthought, but it soon became apparent that would not be the case as the Judge seemed adamant about getting these two to determine what was an appropriate “yardstick.”

A “yardstick” is used as to compare one company or industry to another, so that antitrust damages can be measured. For this session, Zuffa’s expert, Blair, did a much better job than Topel. He was clear in his rejection for of the Plaintiffs’ yardsticks, noting how not on them were a perfect match for the UFC and MMA. The problem for the Defendants was that the Judge seemed adamant about finding if not a perfect match, than the closest comparison possible.

Zimbalist in turn seemed more than willing to offer a wide range of comparators, from the major league sports to professional boxing. The days session felt much like an old Bloody Elbow comments section, with discussion of how collective bargaining agreements, the Ali Act, and free agency impact wages. As the hearing progressed the Judge began to focus more and more on boxing, asking if the similarities between the two didn’t make it the best yardstick. While the Plaintiffs seemed to agree, the Defendants in turn seemed to argue that the wage shares for boxing being used by the Plaintiffs was unreliable.

Going Forward

Class certification looks like it might be the last major hurdle for the Plaintiffs, before getting a trial. If it fails to attain Class Certification, then while individual fighters could pursue their own suits, the biggest threat to the UFC would have mostly subsided.

If, and it’s still a big if, the Class Certification was granted than the Plaintiffs would still face an appeal of the decision as well as Summary Judgment, before finally getting a trial. For the Defendants, it would mean they’re one step closer to a possible trial where treble damages as well as a remedy could be the potential result.

The next hearings have been scheduled for September 12-13.

For more coverage of the hearings I recommend the Show Money Podcast, where we covered the first three days of the hearings, MMA Payout’s winners and losers through the first two days, the Expert Reports that Jason Cruz has posted, Paul Gift’s summary of the week’s hearings, and Josh Gross’s Gross Point Blank Podcast interview with Cung Le, Nate Quarry, Kyle Kingsbury, and Jon Fitch.

*This article originally appeared on Bloody Elbow. It was written by John S. Nash on Sept. 3, 2019