Bob Gilder, Ken Green, John Inman, Rafe Botts v. Pga Tour, Inc., a Maryland Nonprofit Corporation

Citations: 936 F.2d 417; 91 Daily Journal DAR 6899; 91 Cal. Daily Op. Serv. 4622; 1991 U.S. App. LEXIS 11890; 1991 WL 97821Docket: 89-16725

Court: Court of Appeals for the Ninth Circuit; June 12, 1991; Federal Appellate Court

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Karsten Manufacturing Corporation and eight professional golfers, including Bob Gilder, have legally challenged the PGA Tour's new rule prohibiting golf clubs with U-shaped grooves, asserting violations of antitrust and state law. Following a three-day hearing, the district court issued a preliminary injunction to prevent the rule's enforcement, prompting the PGA to appeal. The court upheld the injunction.

The rule change specifically bans clubs with square or U-shaped grooves, favoring those with V-shaped grooves. Karsten, which produces the popular "Ping Eye 2" clubs featuring U-grooves, contends that the new regulation would damage its reputation and force it to produce what it deems inferior V-grooved clubs. The professional golfers involved all utilize these U-grooved clubs during competition, and Karsten is funding their legal fees.

The PGA, led by Commissioner Dean A. Beman and the Tournament Policy Board, represents the interests of professional golf tournaments. The Policy Board consists of ten members, including player-elected directors and independent volunteers. The controversy traces back to a 1984 rule change by the USGA that allowed U-grooves, which some players later claimed diminished the competitive skill in the game due to their enhanced spin capabilities. Although the USGA initially found that U-grooves increased spin, it later concluded there was insufficient evidence to prohibit their use.

On August 10, 1987, the PGA conducted an equipment survey revealing that 73% of participating golfers used U-groove clubs, citing improved control in wet conditions as a primary advantage. Despite this, 60% of respondents favored banning U-grooves. In September 1987, Commissioner Beman informed golf club manufacturers about the PGA's investigation into U-grooves, requesting relevant data, which Karsten did not provide. By November 1987, independent tests confirmed that U-grooves impart more spin than V-grooves, though the effect was negligible in lesser lofted clubs.

On May 12, 1988, Beman recommended a public comment period for a proposed U-groove ban, which the board accepted on May 24. Following manufacturer feedback, the proposal was amended, but on August 16, 1988, the PGA postponed the ban pending further studies by the USGA. The USGA's tests indicated a difference in spin rates but not significant enough to justify a ban.

Beman persisted in advocating for the ban, which required a majority of directors and three player directors to vote. During the February 28, 1989 meeting, player directors abstained due to conflicts of interest, while independent directors unanimously supported the rule, effective January 1, 1990. Karsten expressed concerns to the PGA in June and August 1989, asserting their testing found no spin effect from U-grooves.

On August 11, 1989, Karsten sued the USGA over a prior decision banning U-grooves, which applied to USGA tournaments from 1990 and amateur tournaments in 1996. This lawsuit was settled, but Karsten filed a new suit against the PGA on December 1, 1989, alleging violations of the Sherman Anti-Trust Act, Arizona antitrust laws, and interference with business relationships, alongside claims of breach of fiduciary duty against PGA directors.

On December 5, 1989, the PGA board convened and voted to amend bylaws, allowing disinterested members to act on behalf of the policy board in cases of conflict. The disinterested directors then unanimously readopted the U-groove rule. An evidentiary hearing for Karsten’s suit occurred on December 15, 19, and 20, 1989, during which Karsten's Vice-President testified on the lack of performance improvement from U-grooves.

At the hearing, economist Dr. Richard Smith from Arizona State University testified on behalf of Karsten, asserting that the grooves in Ping Eye 2 clubs do not negatively impact players' performance on the PGA Tour. He noted that players using Ping Eye 2 clubs have won a smaller percentage of prize money compared to the overall percentage of players using those clubs, indicating no competitive advantage. Smith further argued that the clubs do not aid players in reaching greens in fewer strokes than regulation and highlighted a correlation between consumer and professional choices in golf clubs. He stated that Karsten's market share has declined due to the PGA's ban on U-groove clubs, and that compliance with this ban would harm Karsten's reputation and players' endorsement opportunities.

Witnesses included professional golfers Bob Gilder, who expressed that switching clubs could negatively impact his game and endorsements, and George Lanning, a left-handed golfer who believed Karsten produced the only quality left-handed clubs and feared losing his Tour exemption. Tom Kite testified that U-grooves reduced the skill factor in golf. PGA Commissioner Beman warned that granting a preliminary injunction would severely hinder the PGA's ability to enforce rules in professional tournaments.

Following the evidentiary hearing, the district court determined that Karsten and the professional players had shown (1) a reasonable chance of success on the merits, (2) potential for irreparable injury without the injunction, (3) a significant balance of hardships in favor of the plaintiffs, and (4) serious questions for litigation. The PGA has appealed this decision.

Regarding jurisdiction, the court confirmed federal question jurisdiction based on alleged violations of the Sherman Anti-Trust Act, with pendent jurisdiction for state claims arising from a common nucleus of facts related to both the antitrust claims and the PGA director's fiduciary duties.

A federal claim is deemed insubstantial if it lacks merit or is frivolous; however, this does not preclude jurisdiction under 28 U.S.C. § 1337. In the present case, antitrust claims against the PGA regarding the banning of U-groove clubs are considered substantial, allowing for jurisdiction. The district court also has pendent jurisdiction over related state claims. An injunction can be issued based solely on these pendent claims. The standard for reviewing a preliminary injunction is whether the district court abused its discretion or made erroneous legal or factual findings. 

To obtain a preliminary injunction, Karsten and the professional plaintiffs must demonstrate either a likelihood of success on the merits and potential irreparable harm or present serious questions about the merits with a favorable balance of hardships. The balance of hardship is critical; if it heavily favors the plaintiffs, they require a lesser likelihood of success. "Serious questions" refer to complex legal issues that warrant preserving the status quo to avoid altering the case's resolution before a final judgment, necessitating a fair chance of success rather than a certainty.

The PGA contests the district court's assessment regarding the balance of hardships and the existence of serious questions on the merits related to the preliminary injunction granted to Karsten and the professional player plaintiffs. The district court found that the balance of hardships favored the plaintiffs, a determination the PGA disputes, arguing that the potential harm to itself is significant while the harm to the plaintiffs is minimal.

The court determined that the professional players would face irreparable harm if required to abandon their Ping Eye 2 clubs due to the impact on their tournament qualifications and endorsement opportunities. The PGA claims the players' injuries are speculative and insufficient for a preliminary injunction, referencing past cases where plaintiffs failed to show imminent harm. However, the district court concluded that the players demonstrated a clear and immediate threat of injury, asserting that the ban would disadvantage them competitively and adversely affect their earnings and eligibility. The difficulty in quantifying these injuries does not render them speculative, as imminent threats of injury that are hard to measure justify the need for an injunction.

The court also found that Karsten Manufacturing would incur significant harm, as it would need to redesign its clubs, change manufacturing processes, and potentially damage its established market presence. Despite PGA's assertion that Karsten did not prove harm, evidence indicated that the U-groove design is closely associated with the Ping Eye 2 brand, and expert testimony suggested that Karsten's reputation would suffer if forced to switch to V-grooves. Thus, the district court's conclusions regarding irreparable harm to both the professional players and Karsten were upheld as not being clearly erroneous.

PGA contends that Karsten's claims of irreparable harm stem from Karsten's delay in complying with a rule change and argues that this delay unjustifiably postponed the initiation of the action. Citing precedents, PGA highlights cases where significant delays in seeking injunctions were deemed relevant to the urgency of claims. However, the district court found that Karsten acted with reasonable diligence, noting that he sought a meeting with the PGA soon after the rule change and took time to review relevant test data. The court's determination that Karsten's timing was reasonable is not seen as clearly erroneous.

In assessing harm, the district court concluded that the potential damage to PGA's reputation, stemming from the injunction, is less significant compared to the severe financial and reputational injuries faced by Karsten and the professional player plaintiffs. PGA's arguments regarding damage to its ability to enforce rules and maintain its prestige were acknowledged but ultimately deemed insufficient to outweigh the harms experienced by Karsten.

The district court also found that serious questions exist regarding the validity of the PGA Board's decision to implement the U-groove ban, particularly concerning potential breaches of fiduciary duties by board members who may have had conflicting financial interests. The court did not abuse its discretion in identifying these serious questions that warrant further examination in a hearing on the merits.

Individual plaintiffs, as members of the PGA organization, assert that the board of directors owes them a fiduciary duty, citing Levin v. Levin. They argue that player and officer directors must act in the corporation's best interests and cannot use their positions for personal gain. The PGA contends that Maryland law permits interested directors to vote on matters after full disclosure and approval by non-interested directors, but the statute does not clarify whether such voting constitutes a breach of fiduciary duty. 

The district court found that the PGA Policy Board's initial vote to adopt the U-groove ban breached PGA by-laws, as player directors did not vote due to conflicts of interest stemming from ties to competing golf club manufacturers. The court noted that voting with a conflict of interest may violate fiduciary duties and that it can intervene to prevent fraudulent or duty-breaching actions by directors.

The court did not resolve the merits of these issues at this stage but affirmed that the district court acted within its discretion, deeming there are serious questions to be addressed at trial. Consequently, a preliminary injunction was deemed necessary to maintain the status quo until a hearing on the merits, with the balance of hardships favoring the plaintiffs. The district court's judgment was affirmed.

During cross-examination, it was revealed that professional golfers use a distinct type of golf ball that is different from what average consumers use. John Solheim explained that the professional ball has a shorter lifespan, making it economically unfeasible for regular golfers. Furthermore, manufacturers do not highlight this difference in their advertising, focusing instead on the product name. The U-groove is notably associated with Karsten's Ping Eye 2 clubs.

The document notes that the antitrust issues raised have been thoroughly briefed by both parties, though no opinion on these issues is expressed, aside from acknowledging their significance. It is concluded that the district court had pendent jurisdiction over the state claims presented by Karsten and the professional plaintiffs, allowing an injunction to be based solely on these claims.

The review standard for a preliminary injunction is that it can only be reversed if the district court abused its discretion or based its decision on incorrect legal standards or factual errors. Preliminary injunctions are generally assessed early in proceedings, with limited scope for review. The outcome of this appeal will only affect the parties' rights until a judgment is reached on the case's merits.

For a preliminary injunction, Karsten and the professional plaintiffs must demonstrate either a likelihood of success on the merits coupled with the risk of irreparable injury, or present serious questions regarding the merits with the balance of hardships favoring them. The relative hardship to the parties is critical; if it significantly favors the plaintiffs, they do not need to show as strong a likelihood of success on the merits.

The term "serious questions" refers to unresolved issues that necessitate maintaining the current situation to prevent either party from influencing the outcome of those questions or any potential judgment. These questions are characterized as substantial, difficult, and doubtful, warranting further investigation without requiring a certainty or high probability of success, but rather a fair chance of success on the merits. 

The PGA challenges the district court's evaluation of the balance of hardships and the existence of serious questions. However, the court's decision to grant a preliminary injunction was deemed not to constitute an abuse of discretion. The district court found that the balance of hardships significantly favored Karsten and the professional player plaintiffs, contrary to the PGA's claims of substantial harm to itself and minimal harm to the plaintiffs.

The court concluded that the professional players would suffer irreparable harm if forced to abandon their Ping Eye 2 clubs, affecting their competitiveness and endorsement opportunities. The PGA argued that the plaintiffs’ injuries were speculative, referencing precedents that support the notion that speculative injuries do not warrant injunctive relief. Nonetheless, the district court determined that the players demonstrated an immediate threat of injury, as changing clubs would place them at a competitive disadvantage, adversely impacting their performance, earnings, and eligibility for the tour. The court acknowledged that the inability to quantify this injury does not render it speculative, affirming that imminent threats of injury that cannot be easily measured warrant injunctive relief.

The district court concluded that the individual plaintiffs would suffer irreparable harm due to the enforcement of the U-groove ban. Karsten Manufacturing would face significant challenges, including redesigning its golf clubs, retooling its manufacturing process, and possibly damaging its established market presence. Evidence indicated potential harm to Karsten's reputation as a golf club manufacturer, countering PGA's argument that customer purchasing decisions do not rely on club grooves. PGA claimed Karsten's harm stemmed from delays in compliance with the rule change, citing past cases that considered delay in seeking injunctions. However, the court found that Karsten acted with reasonable diligence, having engaged with the PGA shortly after the rule was approved. 

In weighing harms, the district court determined that the potential damage to the PGA’s reputation was less significant compared to the severe financial and reputational injuries faced by Karsten and the professional players. While the PGA argued that an injunction would hinder its ability to enforce rules and damage its prestige, the court emphasized that the balance of harms favored Karsten and the players, as they demonstrated more substantial injuries.

The district court's decision is upheld, concluding that the balance of hardships strongly favors the Karsten and professional player plaintiffs. The court did not err in finding that serious questions exist regarding the merits of the case, particularly concerning the PGA Board's approval of the U-groove ban. Allegations suggest that PGA directors breached their fiduciary duties by improperly voting on a matter where they had conflicting financial interests, violating PGA by-laws that required player directors to participate in such votes. Although the PGA contends that Maryland law permits interested directors to vote after disclosure and approval by non-interested directors, this does not address potential fiduciary violations. The district court identified that the initial vote on the U-groove ban excluded player directors, who had conflicts of interest due to ties with competing manufacturers, and noted that subsequent by-law amendments allowed non-interested directors to vote, potentially to facilitate the ban's adoption. The court emphasized that it could intervene to address breaches of fiduciary duty but refrained from making a final determination at this stage. As a result, the preliminary injunction is deemed necessary to maintain the previous status quo until a trial can address these serious questions.

The district court affirmed its decision to grant a preliminary injunction in favor of the plaintiffs, highlighting the presence of serious questions warranting trial and a significant imbalance of hardships favoring the plaintiffs. The fairway grass is maintained short for optimal play, while taller grass in the "rough" disadvantages golfers. The USGA's new measurement method resulted in the initial ban of Ping Eye 2 clubs, but following a settlement, these clubs are now deemed conforming. The concept of "regulation" in golf is defined in relation to par, with the number of strokes expected to reach the green adjusted for putting strokes. During cross-examination, it was revealed that professional golfers use a different ball than regular consumers, which has a shorter lifespan and is not marketed to average players. The distinction between professional and consumer balls is not emphasized in advertising. The court acknowledges extensive briefing on antitrust issues but refrains from expressing opinions on those matters, confirming they are not insubstantial.