Is There a Formula One Antitrust Conspiracy Against Mario Andretti?

A secret agreement between rivals. A $200m entry fee. First, House Judiciary investigated. Now, DOJ Antitrust Division is on the case. Should Formula One worry? (Yes. Yes they should).

With the Four Part US v. Google series behind us — there is nothing left to do there but wait for appellate briefing. Perhaps we will revisit it then. But US v. Google has had more than enough attention. It is time to move on to other fun issues and topics. And this week, Competition on the Merits is moving on to a few cases and issues that have received less attention but that I have been thinking about. Well, everything has received less attention than the Google litigation so that is not saying much. But I want to focus this week on a few issues that have gone a bit under the radar as far as I’m concerned, including some consumer protection issues brewing at the FTC.

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We’re going to stay in the antitrust lane for now and start with the battle that is heating up between Andretti Global and General Motors (collectively, Andretti Cadillac) on the one hand and Formula One, Liberty Media, and the 10 existing F1 teams on the other.

This battle got a bit of attention back in January when Formula One rejected Andretti Cadillac’s entry into Formula One. But things escalated quickly with the House Judiciary Committee sending a letter to Formula One and Liberty Media demanding an explanation and intimating exposure under Section 1 of the Sherman Act for an unlawful boycott. And just three weeks ago, the DOJ Antitrust Division opened its own investigation of F1 and Liberty Media.

The questions for the day:

How should we understand the dispute between Andretti Cadillac and F1/ Liberty Media from an antitrust perspective? Is there anything to a potential antitrust claim here whether from DOJ or private litigation?

Dear readers, start your engines. (Sorry, I couldn’t help it).

The Alleged Boycott and Background

To understand the moving parts for a potential antitrust claim we should begin with getting the various players and their competitive interests straight.

Formula One racing is an interesting entity with all sorts of complicated partial ownership and control arrangements. But it large part it operates largely like most sports leagues you might be familiar with. It has a governing body: The Fédération Internationale de l'Automobile (FIA) promulgates and enforces the various rules for motor sports. The Formula One Group (FOG) itself is a privately owned by a group of companies that runs the business end of the Formula One World Championship, up to and including exercising broadcast rights. Liberty Media purchased a controlling interest in FOG in 2016 for $4.4 billion and tther entities hold the remaining interests in the FOG.

There are other important entities in the space, of course: the teams! There are 10 F1 teams: Red Bull Racing, McLaren, Ferrari, Mercedes, Aston Martin, RB, Haas, Alpine, Williams, and Kick Sauber.

Finally, there is an agreement between the FIA, the Formula One teams, and the FOG. The “Concorde Agreement,” as it is called, lays out how F1 will be run both in terms of the regulatory framework for the faces themselves as well as the commercial and financial terms. For example, the Concorde Agreement lays out how much the various finishing positions are worth, profit-sharing provisions, and bonus payments. The original Concorde Agreement was signed in 1981 and it is modified from time to time with the latest iteration in 2021 and, importantly, another expected in 2025. The terms have generally been kept secret with a few exceptions when older versions have been leaked to the press.

The 2021 Concorde Agreement also, importantly, has terms that govern new entry. Reportedly, the agreement contemplates entry of up to two additional teams if the new entrant is approved by the FIA. The new entrant must pay a $200 million “dilution fee.” Why? McLaren’s Zak Brown explains the purpose of the dilution fee is “to protect the value of existing teams.” It is sometimes reported, though it remains uncertain, that the Concorde Agreement stipulates that the FOG may waive the $200 million fee only with the consent of the existing teams.

So what happened? On October 2, 2023, the FIA approved Andretti Cadillac’s application to enter Formula One. Andretti Cadillac was the only of four applicants to receive FIA approval after a “comprehensive” and “stringent” process. FIA’s review process included sporting ability, technical aspects, and the team’s ability to raise sufficient funds to compete. But on

“It’s About the Money”

Or so says FIA president, Mohammed Ben Sulayem. And the math behind the dilution fee is relatively simple, as Luke Smith’s excellent NYT piece lays out:

All 10 teams have stressed the importance of the financial stability offered within F1’s existing model, making them wary of any factors that could bring about negative consequences. By adding Andretti to the grid, their prize money payouts would be diluted, the overall fund being split 11 ways instead of 10.

To make up for this, the current Concorde Agreement — the commercial contract between F1, the FIA and the 10 teams — set a $200 million “dilution fee” for any new entrant. But that was back in 2020, when the series was fighting to keep all 10 teams afloat following the onset of the Covid-19 pandemic.

The problem? The 2021 Concorde Agreement negotiated during the pandemic sets an entry price well below what team owners expect to lose in the current marketplace. Liberty Media paid out about $1.157 billion in prize money in 2022. That’s the revenue that comes from broadcast rights, hosting fees, sponsorships, and so forth. Split among ten teams that averages out to $115.7 million per team. But what if we allow entry and divide by 11 instead of 10? Here’s Smith doing the division for us and explaining:

If the 2022 numbers were split 11 ways, that number would fall to $105.18 million, leaving each team $10 million out of pocket. Considering F1’s continued commercial growth — the 2023 third quarter team payouts rose 17 percent alone, albeit thanks to one additional F1 race — the actual loss would likely be greater.

Sticking with the conservative $10 million figure, a $200 million dilution fee, split 10 ways at $20 million per team, would make up for just two seasons of reduced FOM revenue for teams. The belief through the grid, therefore, is the fee should be at least tripled when the next Concorde Agreement is signed, for the 2026 season.

Figuring out the incentives to exclude a new entrant is not rocket science. F1 is growing. And in particular, if we use the pandemic during which the 2021 Concorde Agreement was signed as a baseline, it is growing quickly. The $200 million dollar entry fee designed to pay existing owners for increasing the denominator by 1 was priced in an era that does not reflect that growth. Compensating existing team owners $20 million per team while adding a new entrant like Andretti Cadillac simply does not compensate for what the teams anticipate is much larger losses from diluting from 10% (1/10 teams) to 9% (1/11 teams) their respective shares of the pie over time.

That math explains a few things. It explains why the existing F1 owners would want to wait for a new Concorde Agreement rather than allow entry under the existing one. Presuming Liberty Media and the FOG wants to keep existing teams happy, it also explains why they would reject Andretti Cadillac’s application even if the FIA approved it from a sporting and technical perspective.

The teams appear to individually understand and acknowledge that allowing Andretti Cadillac in would expand the pie and grow output. The Williams’ team principal, James Vowles, acknowledged that Andretti was “the sort of (automaker) that will grow our sport as a result of things,” but said his individual incentive was to exclude them because “Fundamentally, it’s still around the finances of Williams, which is where my focus is.”

COTM readers who are antitrust lawyers just had the hair on their neck stand up a bit reading Vowles’ quote. Of course, competition itself is not in the individual interest of any competitor! More competition hurts the individual competitor but grows the size of the pie. That is precisely why competition is so important. It is also why the antitrust laws ban collective action to prevent competition. We even make it a felony sometimes! But here is Williams saying the quiet part out loud: we think Andretti’s entry would expand output and intensify competition but our individual interest is to prevent it.

But that the individual and collective choices of the existing F1 teams and FOG to exclude Andretti Cadillac are profit-maximizing does not answer whether it is an antitrust violation or creates some risk of antitrust liability for the teams and Liberty Media.

Let’s turn to that now.

Antitrust Boycotts: A Quick Primer on Section 1 and Concerted Refusals to Deal

I’ll try to be quick about the basics here.

Section 1 of the Sherman Act prohibits agreements between competitors that restrain trade. This is not the place for a long primer on the many ins and outs of Section 1 case law. But the basic idea of Section 1’s prohibition against conspiracies is a simple one. The Sherman Act is the manifestation of Congress’s judgment that “ultimately competition will produce produce not only lower prices, but also better goods and services.” (National Soc. of Professional Engineers v. US (1978)).

Section 1 prohibits agreements between rivals to fix the price, or restrict output, or divide market territories — or restrict competition in just about any other way. These — it also prohibits agreements between rivals to exclude competitors. Naked agreements that restrict competition are often “per se” illegal. In these cases — the only real issue is whether the agreement exists or not. The plaintiff need not bother with defining markets, proving market power, and proving the specific agreement harmed competition — the sort of thing we discussed at great length in the context of DOJ’s monopolization suit against Google which was analyzed under the rule of reason. For naked agreements among rivals the analysis is streamlined precisely because we already know it is very likely to harm competition.

Agreements between rivals can also be analyzed under the rule of reason. But only when they are linked to some procompetitive purpose. For example, all kinds of agreements between rivals that involve joint ventures, or the creation of a new product, or some procompetitive venture that requires some agreement between the cooperating rivals are analyzed under the rule of reason. The key question to trigger “per se” analysis under Section 1 is whether the agreement is the type that the courts know — whether through judicial learning or economic learning — will “always or almost always restrict output.” Naked agreements fit that bill. Many others do not.

What about when the rivals do not agree on price or output but rather agree with one another not to deal with a new firm? These cases are generally referred to as “concerted” refusals to deal. These cases are relatively common and arise in all sorts of contexts. Trade association decisions whether to admit new members is one very common example. You will not be surprised to learn that sports leagues are another! You can see where this is headed.

Without getting too deep into the history and evolution of Section 1 doctrine when it comes to boycotts, aka concerted refusals to deal, it is an area where the Supreme Court itself has observed “there is more confusion about the scope and operation of the per se rule against group boycotts than in reference to any other aspect of the per se doctrine.” And so there is.

The short version of the history starts with observing that the Supreme Court largely treated group boycotts as per se illegal through a series of decisions culminating in Klor’s v. Broadway Hale Stores in 1959. In Klor’s the Supreme Court observed:

Group boycotts, or concerted refusals to deal … have long been held to be in in the forbidden category. They have not been saved by allegations that they were reasonable in the specific circumstances, nor by a failure to show that they “fixed or regulated prices….” Even when they operated to lower prices or temporarily to stimulate competition they were banned.

OK, per se illegal. That’s not so confusing. But fast forward to 1985 when the Supreme Court decided another group boycott case — Northwest Wholesale Stationers v. Pacific Stationery & Printing Co. (1985) — and things change quickly. The Supreme Court announced that no longer would all boycotts receive per se treatment. Some would. But others would be analyzed under the rule of reason. Which ones get per se treatment?

Cases to which the Court has applied the per se approach have generally involved joint efforts by a firm of firms to disadvantage competitors by “either directly denying or persuading or coercing suppliers or customers to deny relationships the competitors need in the competitive struggle.” In these cases, the boycott often cut off access to a supply, facility, or market necessary to enable the boycotted firm to compete, and frequently the boycotting firm possessed a dominant position in the relevant market. In addition, the practices were generally not justified by plausible arguments that they were intended to enhance overall efficiency and make markets more competitive…. . Although a concerted refusal to deal need not necessarily possess all of these traits to merit per se treatment, not every cooperative activity inivolving a restraint or exclusion will share with the per se forbidden boycotts the likelihood of predominantly anticompetitive consequences.

That’s a mouthful. And the Court has refined the statement a bit in later cases. It is also worth briefly pointing out what courts have done with boycott claims in the sports context. Sports leagues by their very nature require rules to govern competition among teams on the field, individual players, and the commercial decisions made by members of the league. Some of these are necessary for competition or have some obvious procompetitive purpose. Thus, courts have applied the rule of reason to analyze agreements between league members to do everything from impose disciplinary measures for players to scheduling requirements to setting league maximums for the number of games played.

But courts have consistently struck down rules that did not have a clear nexus to competition and had plainly anticompetitive effects. Recent decisions against the NCAA in O’Bannon v. NCAA and NCAA v. Alston provided major wins for plaintiffs alleging Section 1 claims against sports organizations and leagues. We discussed some of the implications of those decisions for Olympic sports in NCAA institutions here. The upshot of those recent NCAA losses, as well as an important Supreme Court decision involving the NFL in 2010, are that members of leagues can be treated as rivals for the purpose of Section 1 analysis, and that courts will scrutinize closely claimed procompetitive explanations for restrictions on competition.

There’s a lot here. But, let’s distill the doctrine down to a few principles we can rely upon to explore the Formula One / Andretti Cadillac situation:

• Restraints in sports leagues are going to be analyzed like competitive restraints in any other market — that is, claims that the sport “needs” to restrict competition to survive are likely to fall upon deaf ears.

• A concerted boycott claim requires, well, concerted action, i.e. an agreement between rivals.

• Group boycotts are sometimes treated as per se illegal — but only when the plaintiff can show:

  • The boycott cut off the plaintiff from a key competitive input;

  • The defendant has market power; and

  • There are no plausible procompetitive explanations for the boycott

• Otherwise, boycotts are analyzed under a rule of reason analysis that requires the plaintiff to define the relevant market, demonstrate market power, and prove that the boycott harmed competition.

That’s a quick and dirty primer that skips over some potentially important details. But it is enough to get the job done for now and give a sense of why Liberty Media, FOG, and the 10 individual teams ought to be pretty concerned about antitrust exposure.

Are Formula One, Liberty Media and the F1 Teams Unlawfully Boycotting Andretti Cadillac?

Let’s start with the Concorde Agreement itself. We do not know much about the agreement. It’s a secret. And all of that. But that does not do much for it in the world of antitrust defenses where the paradigmatic price-fixing agreement is negotiated in a secret, smoke-filled room. But atmospherics aside, there are some real problems here.

The Concorde Agreement is an agreement between FIA, FOG (Liberty Media), and the F1 teams. We do not know exactly what it looks like. Here is a copy of the 1997 agreement — which I believe is the only version ever published. The 1997 version even contains a promise that parties to the agreement will destroy it and issue a “certificate of destruction.”

Recall our elements for a per se group boycott claim: (1) an agreement among rivals; (2) that cuts off a potential rival from a key competitive input; (3) from a group that has market power; and (4) no procompetitive explanation for the conduct. Let’s just walk through those together. I do not mean for this to be a substitute for comprehensive analysis. At this point we just have what has been reported publicly and through Congressional letters like those from Jim Jordan and the House Judiciary Committee.

Agreement Among Rivals

Um. Yeah. The distinction between concerted conduct and unilateral conduct is a remarkably important one in antitrust law. Section 1 hinges upon it. A unilateral decision by FOG to exclude Andretti Cadillac would be analyzed more liberally. But that is not what we appear to have here. Instead, we have an agreement between Liberty Media (FOG), the F1 teams, and FIA. The F1 teams are rivals both in the Grand Prix and commercially just as the various NCAA institutions and individual NFL franchises are competing entities for antitrust purposes.

I do not know if the Concorde Agreement is signed individually by each team or if all ten teams sign the same agreement. But I do not think it matters for these purposes. It is very likely that a court would infer an agreement among all 12 entities. I suspect the F1 teams and FOG might put up a fight on this front. But I suspect it would be a losing fight with any US court identifying a hub and spoke conspiracy with FOG / FIA at the hub and ten spokes consisting of the incumbent F1 teams.

Does the Group Control a Key Competitive Input?

Um. Yeah. Once again, the question is whether the input is critical to competing. And one simply cannot compete in F1 racing without FIA and FOG approval. Recall that Andretti received FIA approval but was rejected by FOG. This is a no-brainer.*

*There are issues under the surface here for a rule of reason claim. If Andretti Cadillac had to prove up a market definition and market power we would quickly be into arguments about whether F1 racing is a relevant market and what sources of competition constrain its decision-making. But I want to focus for the moment on the prospect of a per se claim — especially since we really do not have access to sufficient facts to evaluate a rule of reason claim, including market definition and competitive effects analysis.

Does FOG Have Market Power?

It sure as hell does in F1 racing. Check. With the same caveat as above about a broader analysis required for an alternative rule of reason claim.

Is There a Plausible Procompetitive Justification for Excluding Andretti Cadillac?

This is where things get interesting. The proffered justification for the agreement appears to be preventing weak entrants from coming to F1, failing, and hurting the product. Sounds pretty good, right? And F1 racing has had some experiences with this with failed entrants in the past.

There are two problems with concluding that these justifications are both procompetitive and plausible rather than pretextual. The first is the FIA decision to approve Andretti Cadillac. The FOG certainly has contractual rights of approval as well. There is no dispute about FOG’s contractual rights to reject Andretti. But an antitrust case is not a contract claim. The FIA is responsible and qualified to evaluate evaluation the technical and sporting virtues of an Andretti entry. The FIA approved. FOG did not. Where did it differ and upon what basis?

FWIW, here’s what FOG itself had to say:

“A novice constructor in partnership with a new entrant PU (power unit) supplier would have a significant challenge to overcome.” and that working with GM from the outset would have “enhanced its credibility.“ On the basis of the application as it stands, we do not believe that the Applicant has shown that it would add value to the championship. We conclude that the Applicant’s application to participate in the championship should not be successful.”

I guess? The basic idea was that Andretti would buy rather than make its own engine in its first couple of years. FIA apparently thought this was not enough to reject the application. And other F1 teams have apparently done the same. But the gap between FIA’s analysis of these issues and FOG’s is an important dispute. And recall that even some of the other F1 teams appeared to acknowledge that entry from Andretti Cadillac would increase the size of the pie but would harm individual rivals. Those quotes seem fundamentally at odds with the FOG decision.

The second problem is understanding that FOG has incentives to disagree with FIA’s technical analysis. Recall that several F1 teams conceded that Andretti Cadillac entry would increase size of the pie, and increase output, but be harmful to individual teams. Mr. Vowles’ remarks on behalf of the Williams team are illustrative and go straight to the “hot docs” pile for any antitrust lawyer. The idea is that the incumbent F1 teams would like to delay entry from the new rival despite the fact that it would increase competition and make consumers better off. With the F1 teams prodding FOG to reject Andretti Cadillac on those anticompetitive grounds — FOG has an incentive to do so. The F1 team incentives to reject a new entrant — even if procompetitive — or at a minimum, delay entry until the next Concorde Agreement can be signed with a higher dilution fee, are clear. Those incentives cast substantial doubt upon FOG’s proffered justifications for the agreement.

What does FOG say now?

We believe our determination, F1's determination, was in compliance with all applicable US antitrust laws, and we've detailed the rationale for our decision, vis-a-vis Andretti in prior statements…. We are certainly not against the idea that any expansion is wrong … There is a methodology for expansion that requires approval of the FIA and the F1 and both groups have to find the criteria met. We're certainly open to new entrants making applications and potentially being approved if those requirements are met.

If your instinct is that this sounds like a statement made after Liberty Media’a antitrust counsel have got a hold of you — your instincts are spot on. I’ve written these statements. I know these statements. This was drafted by counsel. Nothing wrong with that — but it is not especially probative.

The question is will courts closely scrutinize FOG and the incumbent F1 team claims about why Andretti was rejected? Will they be willing to look under the hood at those explanations rather than take FOG at its word? This is where recent changes in antitrust law really change things. If the big NCAA wins in cases like O’Bannon and, more importantly, Alston, stand for anything they stand for the proposition that in cases that walk and talk like cartel agreements the court is more than willing to examine skeptically the parties’ justifications and reject them if they do not make sense. The NCAA’s charade that they needed to withhold pay from college athletes to maintain “amateurism” crumbled because it did not fit the facts. There is something that smelly fishy about Formula One’s explanation here given the tensions with FIA’s decision and the concession from F1 teams that excluding Andretti Cadillac’s entry makes no economic sense other than that it restricts competition for the incumbents.

A few notes to close:

• I’ve focused here on walking through the elements of a per se claim under Section 1 of the Sherman Act against Liberty Media (FOG) and the F1 incumbent teams. But a rule of reason claim is plausible as well. While a plaintiff would have more hurdles to deal with there than under a per se claim, including market definition and competitive effects analysis, I at least wanted to say here that such a claim would require further analysis and is not out of the question.

• If I were counsel for either I would be very concerned at where the DOJ investigation is heading. I would also be very concerned about a private action from individual plaintiffs or an action from the world of entrepreneurial State AGs who are more and more active in the antitrust enforcement landscape.

• I’ve focused primarily on the idea of antitrust exposure for the alleged boycott of Andretti Cadillac. But one can also imagine a cause of action alleging a per se agreement between FOG and the F1 teams in setting the dilution / entry rate at $200 million. Without the benefit of discovery, it is hard to know how far that would go. Were the F1 teams collectively part of that discussion? Did they negotiate individually?

• Antitrust boycott claims are getting more and more popular. Perhaps collective refusal to deal is a function of contemporary cancel culture. For example, much of the analysis here applies to the the X boycott claim against advertisers for allegedly boycotting that platform.

Discovery will be crucial here. In particular, evidence that the F1 teams upon which any concerted refusal to deal claim would be based are involved in the decision to reject Andretti would be significant in establishing liability. As well as to develop any potential rule of reason case. But from the known facts and what can be inferred from the public record — as well as the trends in sports related antitrust cases — there is plenty to be concerned about here for Liberty Media, Formula One, and the F1 teams. And a per se boycott claim is certainly not out of the question.

Sports antitrust cases are sometimes best understood by generalizing away from the idiosyncratic features of the sport. It is difficult to imagine this fact pattern — from the agreement among rivals to set an entry fee to the exclusion of a rival willing to pay the fee because the rivals no longer think it is enough — without antitrust exposure in a different product market setting.

The investigation has just begun. Put on your six-point seat belt. This will be an interesting one to watch.