Does UFC’s Success Exceed Legal Boundaries? Culinary Union Requests FTC Investigation
By Bryanna Fissori
After months of speculation regarding the existence of a Federal Trade Investigation, the Culinary Workers Union – Local 226 based in Las Vegas has come forth to the combat sports media community and announced that they have recently requested a formal investigation of Ultimate Fighting Championship (UFC) parent company Zuffa, LLC.
Numerous media outlets, including BoxingInsider.com were issued a copy of the request which accuses Zuffa of copious counts of anti-trust violations. It is likely no coincidence that circulation of the letter comes just a week following a report that Zuffa has recently obtained the New York based law firm Axinn-Veltrop-Harkrider, LLP which specializes in anti-trust litigation.
THE CULINARY UNION
Why does the Culinary Union care about MMA promotions? They likely do not care at all. It is no secret that the Culinary Union’s main target is Station Casinos, which is owned by Zuffa’s majority shareholders Frank and Lorenzo Fertitta. Station Casinos is not unionized and therefore on the blacklist for the Culinary Union. This is not their first attempt at getting to the Fertittas through Zuffa, as they publicly announced their anti-MMA efforts toward sanctioning the sport in New York this past spring.
The Culinary Union represents restaurant and hotel workers. They and Station Casinos have been in dispute over organizing employees for several years, and according to go to their website (www.culinaryunion226.com) the majority of previous and current protests are against Station Casinos.
The contentions of the Culinary Union focus on two main points which are that Zuffa has obtained a dominant position in the MMA market, and that the company applies contractual restraints on fighters which constitute anti-competitive dealings.
DOMINANT MARKET POSITION
The first assertion of the Union regarding the dominant position of Zuffa’s market share was exemplified by the acquisition of its rivals; World Fighting Alliance (2006), World Extreme Cage Fighting (2006), Pride Fighting Championship (2007) and Strikeforce (2011). Zuffa also obtained the video library and contracts for the International Fight League (2008) but this purchase was not listed. The letter also states;
“In 2008, an independent equities research firm estimated that the UFC controlled 80-90 percent of the mixed martial arts market.”
The implication is that Zuffa retains a monopoly in the MMA market. A monopoly in and of itself is not illegal; therefore even if Zuffa’s share is found to be dominant there may not be a valid cause of action. The actionable claim is found in the manner in which the market share is obtained and held.
The Union letter asserts three points in an attempt to demonstrate that market share has been obtained by the use of contractual restraints and lists the following;
“a) “Automatic renewal” contract provisions such as the “champion’s clause,” which extends the contract of an athlete who becomes a champion. Such clauses effectively prevent some athletes who sign contracts with Zuffa from becoming free agents and negotiating for higher pay.”
b) Exclusive negotiation and “right to match” clauses that lock athletes into negotiating with Zuffa for a period after their contracts have expired. These clauses diminish the ability and incentive of smaller promoters to bid for top mixed martial arts athletes.”
c) Merchandise and ancillary rights agreements that require athletes to forfeit their image and likeness rights “in perpetuity,” or forever. These far-reaching agreements deprive athletes of the freedom to make money from their own success and further bind them to Zuffa indefinitely.”
As to the first contention regarding the “champion’s clause” it has been fairly common practice in the boxing world for years to use automatic contractual extensions when a fighter obtains a title. The extension often lasts the length of the title defense, a maximum of one to three years or a designated number of bouts. There has been recent contention over the validity of such contracts as the New York State Boxing Commission Regulations assert that an option to extend may be available but the extension may not exceed one year. (19 NYCRR § 208.17(b)). The UFC agreement reads as follows;
“if, at the expiration of the Term, Fighter is then UFC champion, the Term shall be automatically extended for a period commencing on the Termination Date and ending on the earlier of (i) one (1) year from the Termination Date; or (ii) the date on which Fighter has participated in three (3) bouts promoted by ZUFFA following the Termination Date (”Extension Term”). Any references to the Term herein shall be deemed to include a reference to the Extension Term, where applicable.”
Under the language of the UFC “Champion’s Clause” it appears that the terms fall within the legal standard for boxing, but though this close precedent may be used it cannot be considered hard law, because MMA does not have an obligation to fall within all boxing regulations.
RIGHT TO MATCH
The second contention regarding the “Right to Match” period referred to by the Union, is another standard clause for the UFC Fighter’s contract and spans the length of one year. During that year following the completion of the Zuffa contract, should a fighter be offered a contract by another promotion, the company has the first option to meet that contract price. It may be relevant to note one difference is that Zuffa is currently the only major promoter also providing health insurance on top of that contract price.
EXCLUSIVE ANCILLARY RIGHTS AGREEMENT
Regarding the third claim which concerns the controversial “ancillary rights agreement,” the Union asserts that the terms of the contract are restrictive as to the fighters ability to be profitable outside of the Zuffa agreement. According to the terms of the UFC Exclusive Promotional Ancillary Rights Agreement state does require a fighter to sign over his eternal rights to his “name, sobriquet, voice, persona, signature, likeness and/or biography.”
“The termination or expiration of either or both of the Promotional Agreements shall not affect or terminate the grant of the Merchandise Rights or any of the general or specific provisions of this Agreement, which shall survive any such expiration or termination.”
The standard UFC Rights Agreement entitles the fighter to 10 percent of gross revenue of sales of Licensed Merchandise completed by Zuffa and 20 percent of gross revenue for royalties and/or license payments received from third parties.
The Rights Agreement defines Licensed Merchandise as “without limitation, all apparel, footwear, hats, photographs, souvenirs, toys, collectibles, trading cards, and any and all other similar type products, including the sleeves, jackets and packaging for such products.” Merchandising Rights under the agreement are “the unrestricted worldwide right to use, edit, disseminate, display, reproduce, print, publish and make any other uses of the identity of fighter in connection with the development, manufacture, distribution, marketing and sale of Licensed Merchandise.”
Essentially, given the language of the contract, even if the fighter was able to find success under another promotion organization such as Bellator or ProElite to name few, the Zuffa rights agreement would prevent the competitor from acting in a movie, doing a commercial, making an action figure, or even creating a website with a URL that uses their own name without authorization from the company.
According to Article III § 3.4 a of the Rights Agreement;
“The Rights include, but are not limited to, the following, which are all in perpetuity throughout the world:
a. The right to all site fees, live-gate receipts, advertising fees, sponsorship fees, and motion picture, all forms of radio, all forms of television (which whenever referred to herein shall include, without limitation, live or delayed, interactive, home or theater, pay, pay-per-view, satellite, closed circuit, cable, subscription, multi-point, master antenna, or other)…”
A court could arguably find the terms of the UFC Exclusive Promotional and Ancillary Rights Agreement substantively unconscionable, and the adhesive nature of the contract procedurally (the manner in which the contract was administered) unconscionable. Substantive unconscionability refers to fairness of the terms of the contract, and is typically available when one party is benefiting more than the other. Though the weight of the unconscionablility argument lies in the substantive aspect, using a sliding scale approach several jurisdictions such as California and Nevada could find the contract unconscionable. The UFC has yet to be brought to court expressly over the Rights Agreement. Whether or not it is an issue for the FTC to decide should recognized during the investigation.
In their final remarks designed to convince the FTC to go forward with an investigation, the Union compares Zuffa to professional footaball before contending that Zuffa’s refusal to co-promote MMA events with rival promotions is an anti-trust violation. The letter states;
“Zuffa’s refusal to co-promote events with smaller firms appears to have no justification except to stifle competition, and may amount to a violation of Section 2 of the Sherman Act, which prohibits monopolization or attempts to monopolize in restraint of trade.”
Typically when two promotions decide to collaborate it is for the mutual financial benefit of the promotions or for the benefit of the card given the circumstances surrounding the particular fighters being pared. It is a business strategy, not a mandate.
There are several ways investigations can be initiated by the FTC which include response to issues raised by reports from consumers and businesses, pre-merger notification filings, congressional inquiries or reports in the media. Because rumors have been circulating for months regarding the possibility of an investigation, it is possible that there is already investigation underway, whether it was initiated through the concerns of the Culinary Union or another party is unknown.
The FTC verified with BoxingInsider.com that their policy is to refrain from publically verifying an investigation until it has been acknowledged by the company being investigated. Though a lot has been implied, Zuffa has yet to expressly confirm or deny the current status of an investigation.