By Mark Conrad
Over the last few months, much has been written about the National Football League’s attempt to convince the U.S. Supreme Court to grant “single entity” immunity to the league under the Sherman Antitrust law. Now that oral argument has been completed, it’s time to take stock of the parties’ arguments, the chances of success and what that would be mean to the economic power of the NFL (and possibly other sports leagues) if their position prevails among a majority of justices.
The facts of American Needle v. NFL(1), involve the termination of a merchandising license. For two decades, plaintiff, American Needle had a license to manufacture headgear utilizing the logos and names of all of the NFL’s constituent franchises. In 2000, the league decided to grant one exclusive license for such merchandise, which was awarded to Reebok. So American Needle was forced to stop manufacturing NFL-licensed goods, and presumably, suffer economic loss.
American Needle challenged the NFL’s exclusivity policy, principally claiming a violation of section 1 of the Sherman Antitrust Law(2). Section 1, the principal antitrust provision, declares illegal any agreements by two or more which unreasonably restrain trade in interstate commerce. Although the language seems clear-cut, the courts have created standards that, in most cases, invoke a balancing test between the pro-competitive reasons for the alleged restriction against the anti-competitive effects. Under what is known as the “rule of reason,” once the plaintiff proves that the agreement is anti-competitive in the appropriate relevant market (in this case, the one for NFL trademarked merchandise), the defendant has the opportunity to defend the practice by demonstrating that there are competitive advantages in this arrangement (such as greater efficiency, quality control and limited damages). All well and good, except, from the NFL (and other defendants’) perspective, the process is costly and time-consuming, and is dependent on a case-by-case determination.
Therefore, the NFL, like other sports leagues, would like to eliminate the opportunity for such litigation. Because sports leagues’ operations are centralized in a great degree (the amount depends on the structure of the league) as part of a cartel structure, it wants a blanket exemption from section 1 challenge due to its “single entity” status. Although the NFL is composed of 32 independently-owned teams, it argues that in reality, it acts as a “unitary organization” (at least in the case of the licensing of its marks). Therefore, an agreement by “two or more” to restraint trade simply cannot exist, negating any claims under section 1 of Sherman.
American Needle saw the matter in a different way, alleging that under prevailing law, the NFL cannot be deemed a single entity because the Supreme Court and most circuit courts have ruled against such a designation(3). The closest the Supreme Court came was in the 1984 case Copperweld v. Independence Tube(4), which concluded that “concerted activity between a parent company and its subsidiary” is not a section 1 violation since it involves one entity. It set a standard that when defendants have “unitary interests” it does not deprive the market of independent sources. Do sports leagues have enough unitary interest to become a single entity? That is the issue at hand in American Needle.
American Needle filed suit in the federal district court for the Northern District of Illinois, a part of the Seventh Circuit, which never directly ruled on the question, but past rulings have demonstrated sympathy for single entity designation(5). Affirming the trial court ruling(6), the Seventh Circuit concluded that the NFL was a single entity for the purposes of their intellectual property licensing(7). Not surprisingly, American Needle filed for certiorari, but in an interesting twist (and a judicial gamble) the NFL also filed, seeking a determination whether the league was a single entity in all matters.
The NFL has a tough hill to climb because interpreting Copperweld to include sports leagues is a stretch. Essentially, the central argument is that without “the league” the individual teams have no economic power – all for one and one for all. However, the one somewhat applicable precedent in sports goes against the view. The court, in the NCAA v. Board of Regents of the University of Oklahoma decision (8) seemingly produces an opposite result, concluding that NCAA football teams are not single entities just because they are under NCAA rules.
But, to the disappointment of the NFL and many scholars, the central claim noted above was not frequently addressed during oral argument. Instead the Supreme Court justices focused on factual issues akin to a rule of reason analysis – something the NFL wanted to eliminate by stressing single entity. The distinct possibility of remand to lower courts to develop more of a factual record was the subject of questions by four of the justices (Sotomayor, Breyer, Stevens and Roberts). Justice Kennedy came closest to addressing the broader issue when he asked about the effect single entity status would have on the economic power of the NFL.
It is evident that most of the justices (maybe all) were skeptical of the NFL’s broadest argument and the questioning demonstrated concerns over the economic effect of single entity status on the labor and product markets. My view is that the chances of the NFL winning full single entity status are nil – since the league is composed of independent teams that do not constitute a unity of interest.
Despite what some thought, I do not see the case presenting a major change in league governance. The likely options are as follows: a rejection of single entity status and remand to the trial court, where that court will employ the rule of reason test to weigh the advantages and anti-competitive effects of the licensing policy; or, less likely, a possibility that the court (in a fractured opinion) could give single entity status to particular league decisions, like exclusive licensing, but that would have to be determined on a case-by-case basis. This would mean that Copperweld could apply to sports leagues, but require a unity of interest to be determined in each case. Hardly the kind of win the NFL wants. The practical considerations of showing the unity of interest would simply result in more litigation. It would therefore be difficult to extend this rationale to other sports leagues, given the differences in issues such as revenue sharing that exist.
Finally, even if the NFL attains the big victory and gets its de jure single entity designation, a post-victory celebration may be premature. The old adage “be careful what you wish for” may apply. Because Congress has the power to amend the antitrust law, look for greater scrutiny of NFL decisions among the elected body and the threats to eliminate its antitrust exemption if powerful politicians question its decisions.
Mark Conrad is an associate professor of Law and Ethics in the School of Business at Fordham University. Recently, he has also taught sports law at New York Law School and Columbia University’s Sport Management program. His book, The Business of Sports – a Primer for Journalists, is available at http://www.taylorandfrancis.com.
1. 08-661. Cert. granted, June 29, 2009.
2. 15 U.S.C. 1
3. See, e.g. See Sullivan v. Nat’l Football League, 34 F.3d 1091 (1st Cir. 1994). L.A. Mem’l Coliseum Comm’n v. Nat’l Football League, 726 F.2d 1381 (9th Cir. 1984).
4. 467 US 752 (1984)
5. See Chicago Professional Sports Ltd Partnership v. National Basketball Ass’n, 95 F.3d 597 (7th Cir. 1996) (”Bulls II”)
6. American Needle v. New Orleans Saints, 496 F. Supp. 2d 941 (N.D. Il. 2007)
7. American Needle v. NFL, 538 F.3d 736 (7th Cir. 2008)
8. 468 U.S. 85 (1984)
