Speedo vs. TYR: A Legal Analysis of the Tech Suit Debacle

Most competitive swimmers are at least generally familiar with the story of how the evolution of tech suits has affected our sport. From paper suits to the Fastskin to the polyurethane suits of 2009, swimming has seen its fair share of changes gear-wise over the last few decades.  Part of the drama which unfolded, mostly behind the scenes, was a lawsuit filed by TYR against numerous other parties, which TYR would eventually lose.

David Meyer is a rising third year law student at DePaul University College of Law in Chicago.  A former swimmer for Tufts University, David participated in the NCAA Division III Championships in 2010 and 2011.  He still trains with his home club teams, Westmont Swim Club and Chicago Masters Swim Club.  In his paper, “The Need for Speed:  How High-Technology Swimsuits Changed the Sport of Swimming“, David discusses the background and legal aspects of the 2009 tech suit debacle, concluding in USA Swimming’s recent change in sponsorship.  The following is an excerpt of the full paper, which you can download here in PDF format.

1.     Sports Equipment:  How the United States Legal System Evaluates National Governing Body Regulations

A.    The Ted Stevens Sports Act and the Sherman Antitrust Act

Equipment regulations are created by each sport’s national governing body (NGB).  Generally speaking, it is rare that manufacturers challenge these rules because either (1) the equipment being questioned has been used since the creation of the sport or (2) the usage of the particular equipment in question has a clear purpose.  If, however, a manufacturer objects to a rule, one of the avenues by which they may seek relief is through the Sherman Antitrust Act.

NGBs derive their authoritative power from the Ted Stevens Sports Act (Sports Act), which was codified in 1998 for the purposes of eliminating friction between competing governing bodies within a single sport to standardize the rules of each game.   When sports equipment manufacturers disagree with a NGB policy, they may utilize the Sherman Antitrust Act, claiming that a certain rule or action prevents consumers from having free choice among market alternatives.  A lawsuit involving Section one of the Sherman Antitrust Act occurs when a manufacturer alleges that a NGB combined or conspired to restrain trade.  Similarly, a lawsuit involving Section two occurs when a manufacturer alleges that a NGB has combined to monopolize trade.  In order to establish a claim against a NGB, sports equipment manufacturers must identify a relevant geographic and product market in which the NGB has power and has conspired to create an anticompetitive effect.

B.     Obstacles Facing Manufacturers

Antitrust cases brought against NGBs involving a conspiracy or combinations to restrict trade through equipment regulations have had an uphill battle.  Courts generally defer to a league’s discretion in the promulgation of its own rules.  This is primarily due to the unique nature of sports and the need for rules to establish standardized competition.  Case law has established two main hurdles for sport equipment manufacturers.  First, courts require manufacturers to reach a high evidentiary threshold in order to successfully plead conspiracy or combination.  Second, the courts’ application of the “rule of reason” standard when analyzing equipment disputes is a policy of strong deference to NGBs.

i.               The High Evidentiary Threshold

In Brookins v. International Motor Contest Ass’n, the International Motor Contest Association (IMCA) amended its rules governing IMCA-sanctioned “modified class” auto races in a way that, at least for a time, barred the use of two transmissions manufactured by the Brookins in that class of races.  The Brookins had created a novel automatic transmission, named the “Ernie Glide.”  Due to its unique design and considerable success, speculation arose among drivers and two competing transmission manufacturers as to whether the Ernie Glide complied with IMCA’s rule governing modified car transmissions.  Before the start of the 1995 racing season, IMCA officials concluded that the Ernie Glide met the text but not the intent of the existing rule.  Consequently, Brookins began to develop a modified Ernie Glide, called the “Ernie Slide”.  Unfortunately, despite being assured that the Ernie Slide complied within the amended regulations, the IMCA further amended the rules to ban the use of either the Ernie Glide or Ernie Slide.

The Eighth Circuit court of appeals upheld the district court’s decision that the Brookins had failed to meet the threshold of showing injury to competition.  Rather, they stated that the exclusion of a manufacturer’s automatic transmissions in racing vehicles was the incidental result of the NGB’s actions in defining the rules of the game, and thus did not constitute a naked restraint having actual effect on competition.  The court further noted that even though the IMCA defines the rules for modified car racing, Brookins did not establish market power on part of the NGB to show an impressible restraint of trade.

Similarly, in Warrior Sports, Inc. v. National Collegiate Athletic Association (NCAA), Warrior Sports brought suit against the NCAA after the NCAA modified their rules rendering all Warrior lacrosse sticks obsolete.  Before 2006, the NCAA had used the same rules regarding the allowable dimensions of lacrosse stick heads for more than 30 years.  As the sport evolved, lacrosse stick manufacturers began designing their equipment to have narrower stick head dimensions, which made it more difficult for lacrosse defenders to dislodge the ball.  In response to these stick developments, the NCAA required manufacturers to submit their equipment to the NCAA to obtain confirmation that their product complied with NCAA lacrosse rules.  After the NCAA adopted its rule changes in 2007, Warrior was asked whether it would be willing to license its intellectual property rights to other lacrosse manufacturers.  Warrior refused, and the NCAA submitted new rules in 2008 which made the warrior lacrosse stick head ineligible for use during competition.

The court dismissed Warrior’s complaint against the NCAA despite what seemed like specific evidence of motive for conspiracy to injure the company and restrict trade.  The court stated that the NCAA’s rule regarding the type of lacrosse equipment that may be used during play is not “commercial in nature.”  Rather, the rule had a noncommercial purpose:  to promote free dislodgment of the ball.  In both Brookins and Warrior, it seems more probable than not that the courts overlooked the NGBs financial incentives to conspire and regulate equipment.

ii.              Application of the “Rule of Reason”

The rule of reason, which was applied in Standard Oil Co. of New Jersey v. United States, provides that only combinations and contracts unreasonably restraining trade are subject to antitrust provisions.  Based upon a plaintiff’s argument, courts will first consider whether the restraint of trade warrants a per se violation because it is blatantly against public policy.  After dismissing a per se violation, courts use the rule of reason to weigh the procompetitive and anticompetitive effects to determine whether the net result would be an unfair restraint of trade under the Sherman Act.  As one of the default tests for analyzing equipment restrictions, lawsuits involving professional sports are unique under this provision because a court has a high degree of independence to determine whether the reason behind a restrictive rule is valid.  This has proven to be problematic because although some practices by NGBs may be unreasonable and subsequently unlawful, the “conspirators” could argue with almost any justification that they have not restrained trade.  This rationale combined with the court’s hesitancy to interfere with NBG policies puts sports equipment manufacturers at a disadvantage.

Court’s applications of the rule of reason have significantly affected the sport of golf.  In Weight-Rite Golf Corp. v. U.S. Golf Ass’n, a court upheld as a reasonable decision of the United States Golf Association (USGA) prohibiting golf shoes that contained a wedge in the sole which helped distribute the golfer’s weight so as to resist the tendency to push away from the ball during the swing.  The court stated “evidence that a single competitor has been removed from a relevant product market, in and of itself, is insufficient to establish a violation of the rule of reason.  Critics of that decision argue exactly the opposite.  Elimination of the only producer of a differentiated product that cannot be duplicated by other suppliers does establish an anticompetitive effect sufficient to satisfy the rule of reason.

Likewise, in Windage v. United States Golf Association, the equipment in that case involved a product named the Windage device.  It was a small, golf-ball-shaped plastic container with talc powder inside.  A golfer could gauge wind direction by squeezing the Windage device to release a puff of talc powder into the air.  The purpose of the device allowed golfers to assess wind conditions without having to bend over to pluck grass to toss into the air.  However, the USGA determined that the Windage device did not conform to the rules of golf, stating it was “an artificial device for the purpose of gauging or measuring conditions that might affect play.”  The Eight Circuit noted “So long as made game-defining rules decision based upon its purposes as a sports organization, an antitrust court need not be concerned with the rationality or fairness of those decisions.”

Thus, it would seem that sports equipment manufacturers have a heavy burden when bringing lawsuits against NGBs.  With respect to swimming, as a sport which does not completely depend upon equipment, these burdens are even greater.  Despite these inherent disadvantages however, the swimsuit manufacturer TYR filed suit against Warnaco, Inc, USA swimming and Speedo for violations of the Sherman Act in 2009.

2.     Antitrust Law in Competitive Swimming:  How TYR Found a Silver Lining in Their Failed Lawsuit

A.    TYR Sport Inc. v. Warnaco Swimwear Inc. 2009:  A Short Lived Victory

In 2008, TYR filed suit against Warnaco, Inc.(Speedo), U.S.A. Swimming, and Erik Vendt. To clarify, per the Sports Act previously discussed, the United States Olympic Committee recognizes U.S.A. Swimming as the national governing body of the sport of swimming. In its complaint, TYR alleged that U.S.A. Swimming combined with Speedo in order to coerce National and Olympic team swimmers to exclusively wear Speedo’s LZR, a violation of Sections One and Two of the Sherman Antitrust Act. At the time this complaint was filed, SpeedoUSA had maintained exclusive technical equipment sponsorship with U.S.A. Swimming for more than 25 years.

Specifically, TYR alleged that the exclusive sponsorship agreement between U.S.A. Swimming and Speedo made U.S.A. Swimming a de facto sales agent for Speedo.  They further argued that in exchange for payments from Speedo, U.S.A. Swimming agreed to act as a promoter for Speedo and to make false statements that Speedo’s products were “superior” and that its rivals’ products were “inferior.”  In support of these accusations, TYR cited several statements made by the national and Olympic team head coach and hired spokesperson Mark Schubert. They further cited U.S.A. Swimming’s repeated refusal to allow Speedo’s competitors the ability to advertise in the official NGB publication (Splash Magazine), and to sponsor U.S.A. Swimming-sanctioned meets.

The court first rejected both Speedo and U.S.A. Swimming’s motions to dismiss, and held that TYR had successfully identified a relevant product and geographic market.  The court further held that the combination of both U.S.A. Swimming and Speedo established a significant power within the market to have an anticompetitive effect on trade.  In so holding, the court focused on the nature of Speedo and U.S.A. Swimming’s actions within their exclusive sponsorship and the alleged unlawful use of that authority.  The judge reasoned that U.S.A. Swimming had motive to affect the market without being a direct market participant because U.S.A. Swimming’s financial incentive to combine with Speedo in an anticompetitive scheme was a result of Speedo’s substantial financial contributions.  In support of the de facto coercion, the court stated that the co-defendant Erik Vendt, who breached his contract with TYR in order to wear the LZR, was a credible example of Speedo and U.S.A. Swimming’s influence on elite competitors.  In recognition of the high threshold that a plaintiff must overcome to show that speech rises to the level of an antitrust violation, a second round of briefing was requested by the court.

The initial holding was significant for sports equipment manufacturers.  Primarily, the holding significantly increased the potential for NGB antitrust liability because it refused to acknowledge that NGBs were given implied immunity. Second, the holding recognized that NGBs could have a financial interest in promulgating certain rules, even if the NGB was not a direct market participant. Despite this decision however, TYR’s victory would not stand for long.

B.     TYR Sport Inc. v. Warnaco Swimwear Inc. 2010:  The Reversal

A year later, litigation continued after motions from both sides were granted and denied. This time around, TYR was not as successful as they were in their initial victory.  The court granted summary judgment in favor of the defendant’s against TYR’s claim of antitrust liability.  The judge held that the statements made by Mark Schubert indicating that coaches should advise their athletes that if they wanted to compete at the highest level they should wear Speedo equipment, was classic puffery and not actionable under antitrust laws.

The court reasoned that Schubert’s statements to a reporter promoting the benefits of the Speedo LZR were clearly exaggerated advertising, blustering, and boasting upon which no reasonable buyer would rely.  Despite Schubert explicitly stating other products were inferior, the court said that his pro-Speedo statements were general statements which contained nothing about the specific attributes of the swimsuit. Further and perhaps more surprising, the court found that the statements, when read in full context and not as carefully plucked snippets, reflected a desire for more competition in swimsuit technology, which Schubert hoped would prolong the careers of swimmers. Finally, the court noted that although there existed a relevant product and geographic market, TYR failed to present evidence of the sales or market shares of any of the competitors. Thus, the court was unable to determine whether TYR’s lost sales were picked up by new entrants or whether Speedo actually lost overall market share to new entrants at any time during the relevant period.

Ultimately, TYR lost its suit because they could not provide evidence from which a reasonable jury could infer a significant and enduring adverse impact on competition.  It was clear that the exclusive sponsorship agreement between Speedo and U.S.A. Swimming had some sort of effect on the market for high-technology swimsuits, but there was no way to confirm such an allegation.  Fortunately for TYR, although they lost their legal battle, they would eventually get what they wanted anyway, the discontinuation of he exclusive sponsorship agreement between Speedo and U.S.A. Swimming.

C.     The Silver Lining:  USA Swimming Ends SpeedoUSA’s Exclusive Sponsorship

In a losing statement to the press on May 3rd, 2010, TYR made the following comment: “While we disagree with the Court’s conclusion that the wrongful acts did not have a sustained impact on the market, it is optimistic that bringing attention to the conduct (referencing U.S.A. Swimming and Speedo’s exclusive agreement) will contribute to greater transparency within U.S.A. Swimming and will bring about fundamental change to the benefit of the sport.”  TYR’s foreshadowing came to fruition, and on December 3rd, 2012, SpeedoUSA and U.S.A. Swimming signed a new sponsorship agreement that expires in 2020. The new agreement states that SpeedoUSA will still be the official sponsor of U.S.A. Swimming, but SpeedoUSA will no longer have exclusive rights in the area of technical equipment.

When asked about the TYR lawsuit and whether or not it affected U.S.A. Swimming’s decision to opening up the market, U.S.A. Swimming’s Chief Marketing Officer Matt Farrell said, “The TYR lawsuit was not a factor.  We did it now because we looked at the success of the trials from an attendance and T.V. ratings perspective, exposure from the Olympic games (London), and the growth of our membership…That motivated us to open the market.  The sport is in a different era now, especially from a star and television perspective.”

The non-exclusive base sponsorships expressed in the new agreements include advertising in U.S.A. Swimming’s official NGB publication, website, webcast, televised events, and retail vending at competitions. In the weeks following the new sponsorship packages, U.S.A. Swimming announced that starting January 1st, 2013, the swimsuit manufacturer Arena would replace Speedo as the National Team’s new exclusive apparel brand sponsor.  Arena will now officially sponsor U.S.A. Swimming’s Grand Prix Circuit and will have worldwide merchandising rights for the U.S.A. Swimming Brand.