The United States Trotting Association, an Ohio Non-Profit Corporation v. Chicago Downs Association, Inc., Fox Valley Trotting Club, Inc., and Illinois Harness Horsemen's Association

Citations: 665 F.2d 781; 1981 U.S. App. LEXIS 15402Docket: 80-1948

Court: Court of Appeals for the Seventh Circuit; December 7, 1981; Federal Appellate Court

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The United States Trotting Association (USTA) filed three lawsuits against the Chicago Downs Association, Inc. and Fox Valley Trotting Club, Inc., alleging unauthorized appropriation of USTA property related to race meeting operations at Sportsman's Park in Illinois during 1975 and 1977. The first two suits claimed violations concerning the use of USTA registration and eligibility certificates, seeking an accounting, monetary damages, and an injunction against further misappropriation. The third suit aimed to prevent Fox Valley from using USTA certificates in the 1978 racing season. 

Fox Valley responded with a counterclaim, accusing USTA of instigating a group boycott in violation of the Sherman Act and interfering with its business relationships with the Illinois Harness Horsemen's Association. The district court granted summary judgment in favor of the defendants on USTA's misappropriation claim, ruling that USTA failed to prove ownership of the certificates. Conversely, Fox Valley's antitrust counterclaim was upheld, finding USTA's actions constituted a per se group boycott, and USTA was found liable for tortious interference with Fox Valley's business relations.

As a result, a permanent injunction was issued against USTA, prohibiting it from sanctioning members merely for participating in Fox Valley's races. The Court of Appeals reversed the district court's summary judgments, remanding the case for further proceedings and vacating the permanent injunction against USTA.

USTA, established in 1939 as a non-profit organization in Ohio, addresses inconsistencies in harness racing regulations and record-keeping that had previously tarnished the sport's reputation. Its mission includes developing national records and standardizing rules. USTA does not engage in breeding, buying, selling, or racing horses and functions solely as a sanctioning body and information repository. 

By 1977, USTA had expanded significantly, boasting over 40,000 members, including 426 fair race tracks and 65 parimutuel tracks, with membership necessary for registering standardbred horses and voting on governance issues. Non-member tracks can affiliate as 'contract tracks,' paying a fee based on their parimutuel take.

Registration certificates issued by USTA detail a horse's physical attributes and ownership, with provisions for recording ownership transfers. USTA maintains centralized records to prevent tampering. Additionally, USTA provides eligibility certificates, which compile performance data from the last eight races and are updated during the racing season. Track officials utilize these certificates to ensure competitive racing. In 'claiming races,' tracks require the USTA registration certificate to be surrendered to the new owner before disbursing the claiming amount, thus promoting fair competition by preventing superior horses from being entered in subpar races.

In Illinois, the regulatory framework for harness racing heavily relies on the United States Trotting Association (USTA). State law mandates that all horses competing in harness races must be registered and approved by USTA, alongside specific requirements outlined in the Illinois Racing Board Rules. These rules stipulate that horses must possess a current USTA eligibility certificate, be tattooed with a USTA identification number, and that any individuals suspended by USTA cannot participate in racing. Additionally, clerks of the course are required to send race details to both USTA and the Illinois Racing Board. Thirteen other states with parimutuel harness racing similarly adopt USTA standards.

Despite this framework, Chicago Downs and Fox Valley did not join USTA as members or purchase its services during the 1975, 1977, and subsequent racing seasons. They continued to race USTA-registered horses and utilize USTA's registration and eligibility information, effectively benefiting from USTA without incurring any costs. In response to this "free ride," USTA announced sanctions against these entities, including ceasing services and declining to record race performances from their meets. USTA referenced its bylaws, which prohibit members from racing at non-USTA tracks and impose penalties for violations, asserting that these rules are essential for maintaining the integrity of its racing information system.

USTA's initial lawsuits claimed misappropriation of its records and services by the defendants, seeking accounting, monetary judgments, and injunctive relief. Defendants argued that registration and eligibility certificates belonged to the horse owners, leading to a summary judgment motion. The court ultimately sided with the defendants, stating USTA did not establish ownership over the certificates or their content, yet did not address USTA's supporting affidavits and documents in its cross-motion for summary judgment.

Defendants argue that USTA's cross-motion for summary judgment prevents it from claiming disputed factual questions on appeal, but legal precedent confirms that a cross-motion does not preclude such claims. The eligibility certificates issued by USTA contain a restrictive legend indicating that they are USTA's property, with usage limited to members and specific purposes. The district court determined that this language did not imply ownership due to the supposed adhesive nature of the contract between horsemen and USTA, but the record does not support the existence of adhesion. Horseowners participate in the governance of USTA by electing a Board of Directors, suggesting they have the collective power to modify terms within the eligibility certificates. Additionally, a similar adhesion argument related to a forum selection clause in USTA's by-laws was rejected, with the court noting that the terms were mutually beneficial for all members, who have the power to amend them. Ultimately, the language on the eligibility certificates is upheld as valid and effectively challenges the presumption of ownership by horsemen.

USTA's ownership of registration certificates raises complex issues, as these certificates lack an explicit affirmation of ownership. Once issued, they remain with horseowners, only returned to USTA for title transfers. The court compared registration certificates to motor vehicle ownership certificates, noting that while USTA has a strong interest in accurate ownership records, it does not own the certificates. USTA can impose penalties for failures or inaccuracies in reporting and can cancel certificates if needed, highlighting their importance for USTA's recordkeeping. The court concluded that USTA has not sufficiently proven ownership of registration certificates to support a misappropriation claim but may present further evidence on remand. USTA is entitled to an accounting, damages, and an injunction based on eligibility certificates, and it may also pursue evidence for ownership claims regarding registration certificates. However, the ruling does not imply that USTA is not owed reimbursement for services provided to nonmember tracks, for which USTA must identify and prove reasonable charges.

In a related antitrust counterclaim, Fox Valley argued that USTA's enforcement of certain rules constituted a group boycott in violation of the Sherman Act. The court granted summary judgment in favor of Fox Valley, permanently enjoining USTA from restricting its members from racing at non-member tracks. Judge Aspen determined that USTA's actions fell under the per se violation standard and that USTA could not use the exception established in Silver v. New York Stock Exchange. Generally, anticompetitive practices are assessed under the rule of reason unless considerable judicial experience has established the conduct as a per se violation.

Certain group boycotts have been deemed per se illegal by the Supreme Court, as seen in cases like Fashion Originators' Guild of America, Inc. v. FTC and Klor's, Inc. v. Broadway-Hale Stores, Inc., where groups attempted to eliminate competition from non-group members. A critical aspect of these per se illegal boycotts is the concerted effort by competitors to exclude rivals, as highlighted in Smith v. Pro Football, Inc. However, the Supreme Court has not applied this per se rule to concerted refusals aimed at purposes other than driving out competition. The term "group boycott" encompasses various concerted activities, and labeling conduct merely as a 'group boycott' may inadvertently prohibit reasonable business practices.

In the present case, the characteristics of per se invalidity found in Klor's and Fashion Originators' Guild are absent. USTA's actions are merely the enforcement of its bylaws without evidence of intent to exclude competitors. Fox Valley did not seek to compete with USTA, nor is there indication of a scheme to eliminate rivals through USTA. Instead, USTA was established to promote honest harness racing, not to impose anti-competitive restraints. Consequently, as per se rules are reserved for clearly anticompetitive conduct, USTA’s application of its rules should be assessed under the rule of reason, similar to the treatment of the Gunter Harz Sports case involving the U.S. Tennis Association.

Courts lack sufficient experience with organizations like USTA to justify applying the per se antitrust rule in this case. Typically, the per se rule is reserved for clearly anticompetitive conduct, suggesting a need for a thorough analysis of USTA's unique characteristics before labeling its actions. The per se rule also overlooks USTA's challenges with free-riding, where entities like Fox Valley can benefit from USTA without contributing financially, undermining incentives for contribution. The extensive USTA membership and its connections with state racing boards may sustain USTA despite these free-riding issues. Labeling USTA's efforts to counteract this as per se violations of the Sherman Act prevents the consideration of any valid justifications USTA might offer and may not lead to procompetitive outcomes.

USTA's conduct must be assessed under the rule of reason rather than a per se standard due to the unique context of organized sports and the necessity for self-regulation. Defendants' reliance on Silver v. New York Stock Exchange to apply a per se rule is misplaced, as that case allows for rule of reason evaluation in instances where justifications stem from other statutes. Judge Aspen's narrow interpretation of this exception contrasts with more expansive interpretations by lower federal courts, which recognize that binding rules are essential for the viability of self-regulating enterprises. Numerous cases affirm that in organized sports, rules requiring interdependence and cooperation should not be automatically deemed illegal under a per se standard, as demonstrated in various court decisions regarding sports associations and their regulations. Courts should avoid rigid categorizations like 'group boycott' and 'per se' when assessing the business necessity and potential harm of specific rules. The trial court must find, rather than assume, any harm to competition. Consequently, USTA's application of its Rules 5 and 17 necessitates a comprehensive antitrust analysis, acknowledging the particular needs of sporting organizations.

A rule of reason analysis necessitates demonstrating an anticompetitive market effect to uphold the purpose of antitrust laws, which are designed to protect competition rather than individual competitors. To establish a Section 1 rule of reason violation, a plaintiff must prove adverse impacts within the relevant market. The court's assessment will focus on whether the challenged conduct exceeded what was reasonably necessary to achieve a legitimate business objective.

Fox Valley's counterclaim alleged that USTA's communications to its members, which warned against supplying racing information to Fox Valley and enforced certain rules, constituted tortious interference with Fox Valley's relationships with the Illinois Harness Horsemen's Association (IHHA). The district court had granted summary judgment for Fox Valley on this claim, but this decision was reversed and remanded for further consideration. 

Key elements of tortious interference include the existence of a valid business relationship or expectancy, knowledge of this relationship by the interferer, intentional interference causing a breach, and resultant damages. Judge Aspen's analysis failed to establish two of these elements. First, there was no evidence that USTA was aware of a specific IHHA agreement with Fox Valley, as the letters sent did not refer to such an agreement. Second, Fox Valley could not demonstrate any damages since USTA has been barred from enforcing its rules against members participating in Fox Valley's events since 1977.

Judge Aspen's conclusions regarding USTA's defenses were also flawed, as he ruled that USTA had no economic interest in eligibility certificates and that enforcing pre-existing contractual rights constituted a boycott, amounting to a per se Sherman Act violation. However, the court determined that USTA did own the eligibility certificates and that no per se antitrust violation was established, making the summary judgment in favor of Fox Valley inappropriate. The ruling was reversed and remanded for further proceedings, with costs awarded to USTA.

Cudahy, Circuit Judge, concurs in part and dissents in part. He agrees that the summary judgment favoring the defendants on misappropriation claims should be reversed but disagrees with the majority's conclusion that the USTA is entitled to summary judgment on the eligibility certificates. He emphasizes that USTA must prove ownership of the certificates' information, referencing a prior case where ownership was established by demonstrating the information was acquired through USTA's own efforts. Cudahy notes that according to USTA officials’ depositions, the information on the certificates is provided by racetrack employees who are not compensated by USTA. Additionally, during the relevant racing season, USTA officials were not present to supervise the data collection at Fox Valley. USTA claims a property interest based on its centralized record-keeping and control over the information, arguing that ownership incidents remain with them. Given these conflicting factual issues, Cudahy advocates for remanding the matter for trial regarding ownership and the registration certificate claim.

Bauer, Circuit Judge, dissents, asserting that USTA has not proven ownership of the eligibility and registration certificates, as horse owners, not USTA, retain possession. He argues that USTA did not provide sufficient evidence in its cross-motion for summary judgment to overcome the presumption of ownership that arises from possession. He clarifies that horse owners pay membership dues and registration fees to obtain certificates, retaining possession until the horse is sold, at which point the certificate is transferred to the new owner after USTA records the transaction.

The district court determined that the registration certificate functions similarly to a title, as it is relied upon by purchasers and transferred during ownership changes. USTA maintains permanent records of horse ownership and issues registration certificates to owners for their exclusive use, charging a fee. However, USTA has not demonstrated ownership of the registration certificate, and further hearings on this matter are unnecessary.

The horse owner also retains sole possession of the eligibility certificate, issued annually for a fee. This certificate is portable, accompanying the owner to different tracks, and is discarded after the racing season, with instructions not to return it to USTA. USTA attempts to assert ownership over the eligibility certificates based on a statement printed on them, claiming the certificates and their information are its property. However, USTA's property interest in the information is contingent upon having invested labor, skill, and money in its compilation, which it has not done, as the information is provided by racetrack employees who do not work for USTA.

Despite USTA's claim that its recordkeeping system relies on the information from the eligibility certificates, it does not monitor the accuracy of the recorded information post-issuance. The court remains skeptical that USTA's regulatory interest qualifies as ownership. Moreover, the statement of ownership printed on the eligibility certificate is undermined by the contractual relationship between horse owners and USTA, which Illinois law mandates for racing eligibility. Since USTA only issues certificates to its members, who have no bargaining power regarding ownership terms, this provision does not support USTA's claim of ownership over the certificates.

The district court concluded that the USTA does not own the certificates in question, which results in the organization lacking a protectible interest in them. Consequently, the district court's order granting summary judgment in favor of the defendants-appellees on USTA's misappropriation claim should be affirmed. There is disagreement regarding the appropriate standard for analysis; the majority suggests that the rule of reason, rather than the per se boycott rule, should apply. The dissent argues that the majority incorrectly believes that courts lack sufficient experience with sporting associations to declare their restrictive membership rules per se unlawful. The dissent clarifies that the relevant inquiry is whether courts have enough experience with the type of restraint in question to determine if it has a "pernicious effect on competition." Courts have established the per se unlawfulness of group boycotts, as demonstrated in precedent cases. Furthermore, the dissent critiques the majority's narrow definition of group boycotts, stating that such conduct can include refusals to deal with non-competitors. Lastly, the dissent refutes the majority's view that USTA's actions are exempt from per se analysis based on the Silver v. New York Stock Exchange case, arguing that the exemption cited pertains only to justifications derived from other statutes and not from the need for industry self-regulation. The dissent emphasizes that arguments favoring monopolistic arrangements over competition due to industry characteristics should be directed to Congress, not justified under the Rule of Reason.

In **Nat'l Soc'y of Professional Eng'rs v. United States**, the court addressed USTA's enforcement of sanctions against member horse owners and drivers participating in the Fox Valley meet. The district court's injunction against USTA prevented it from imposing these sanctions, which could have coerced Fox Valley into compliance with USTA's membership requirements, exemplifying a group boycott as defined by the Supreme Court. The conduct of USTA was determined to be a per se violation of the Sherman Act due to its coercive nature. 

Fox Valley's counterclaim included allegations of tortious interference with its contractual and business relationships with the Illinois Harness Horsemen's Association (IHHA). While the majority agreed that USTA's actions did not ultimately harm Fox Valley due to the injunction, the dissenting opinion held that USTA's interference was indeed tortious. USTA claimed its actions were intended to maintain the integrity of its records system rather than to maliciously disrupt Fox Valley's business. However, this justification was deemed insufficient, as USTA had no legitimate interest at stake and its actions were characterized as a restraint of trade aimed at inducing member horsemen to breach their contracts with Fox Valley.

The dissent concluded by affirming the district court's judgment while emphasizing the tortious nature of USTA's interference, despite IHHA's supportive stance. USTA's membership includes various stakeholders in harness racing, and the involvement of multiple racing associations underscored the importance of maintaining integrity in the sport.

Management organizations sponsoring race meetings, such as Fox Valley and Chicago Downs, qualify as "race tracks" and can join the USTA as members or as contract tracks. In 1976, both defendants compensated USTA for its services. Following the initiation of litigation, USTA was prohibited from enforcing its by-laws to collect payments, leading the defendants to deposit potentially owed amounts with the court. The eligibility certificates from USTA contain a copyright notice, prompting the defendants to argue on appeal that if the certificates are copyrightable, any state-law misappropriation claims would be pre-empted by federal copyright law. Conversely, if not copyrightable, they contend USTA violated 17 U.S.C. § 506(c) by deceptively labeling the work with a copyright notice. The court counters that the certificate bears sufficient creative authorship to be copyrightable and notes USTA does not claim copyright for individual data entries but for the compilations it creates. USTA's misappropriation claim is thus not pre-empted by federal copyright law. Additionally, a related case reaffirmed that USTA eligibility certificates do not belong to individual horsemen. The Michigan Harness Horsemen’s Association concurs that registration certificates are generally government-owned. The court disagrees with the dissenting view that factual issues persist regarding certificate ownership, stating the eligibility certificates clearly indicate ownership and that USTA is uniquely positioned to collect and oversee the use of performance data from various tracks, as the information is essential for scheduling competitive races.

The excerpt highlights a dispute regarding the contributions of certain parties to the aggregation of performance information within an organization. It asserts that these parties claim to provide the necessary resources for this aggregation, yet in reality, they contribute minimally or not at all. The core issue centers on their misappropriation of the aggregated information, which is crucial for their operations.

Additionally, the text references Section 2 of the Sherman Act but notes that Fox Valley has not relied on this provision in court. It discusses a Supreme Court case, St. Paul Fire & Marine Insurance Co. v. Barry, emphasizing that the Court focused on defining "boycott" under the McCarran-Ferguson Act, rather than determining if the conduct was inherently unreasonable. The excerpt raises the question of when conduct fitting the definition of a boycott is deemed conclusively illegal and when its anticompetitive effects can be examined.

The dissent cites various cases illustrating anticompetitive conduct, including cartelization and coercive practices against hospitals and doctors, suggesting a consistent pattern of anticompetitive behavior. Furthermore, it references the Sylvania case, which addressed the issue of free-riding in antitrust contexts.

The majority's argument that the information from individual tracks is largely useless is contested. The excerpt clarifies that, aside from its licensing authority, the USTA plays a minimal role in aggregating performance information. Instead, this information is compiled by track employees on eligibility certificates, which horse owners maintain throughout the racing season. USTA only receives copies of this information post-race, indicating that factual disputes exist regarding the business practices in question.