NFL Sacked by the Sherman Antitrust Act. Merchandise Licensing Subject to Antitrust Law
MLRC Media Law Letter
In a ruling that is still sending tremors across professional sports leagues, the U.S. Supreme Court held that the licensing activity (e.g.,selling branded merchandise items such as jerseys, hats and t-shirts) of the National Football League, its 32 separately owned teams, and the teams' jointly owned affiliate is concerted activity subject to antitrust scrutiny.
The U.S. Supreme Court's unanimous decision in American Needle Inc. v. National Football League et al., No. 08-661, 2010 WL 2025207 (May 24, 2010), may change how professional sports leagues do business with outside vendors. The Supreme Court's ruling struck a significant blow to the longstanding joint venture between the NFL and its 32 member teams to license and market team-owned trademarks through a single entity. The Court's rejection of the NFL's request for a categorical exemption also means that other restrictions by the NFL and other sports leagues are subject to the purview of the antitrust law.
One League, 32 Teams
The NFL is an unincorporated association of separately owned professional football teams. Each team owns its own intellectual property and fights for publicity and a wide fan base. In order to develop, license and market its intellectual property, in 1963 the league formed a distinct legal entity, known as the National Football League Properties (NFLP). For 37 years, the NFLP granted nonexclusive licenses to companies that manufacture and sell team apparel.
In 2000, the 32 NFL teams voted to authorize NFLP to grant exclusive licenses, and NFLP gave Reebok International Ltd., an exclusive 10-year license to produce and sell trademarked headwear for all of the NFL teams. American Needle, which had made and sold headwear under a nonexclusive license for 20 years, sued, challenging the agreements under Section 1 of the Sherman Antitrust Act. Section 1 outlaws contracts, combination or conspiracies that unreasonably restrain trade.
In 2007, the district court granted the NFL entities summary judgment on the basis that the NFL member teams operated as a single entity through the NFLP to market and promote NFL football and so was immune from antirust liability. In 2008, a unanimous three-judge panel of the Seventh Circuit Court of Appeals affirmed, ruling that the teams' concerted efforts were required to produce "NFL football," which competes against other forms of entertainment. The panel likened the legal issue to "a Zen riddle," asking, "Who wins when a football team plays itself?"
NFL Drops the Ball
American Needle petitioned for Supreme Court review. The NFL defendants, joined by the NBA and the NHL, in hindsight committed a costly turnover by making the unusual request of urging review even though they had prevailed in the lower courts. The NFL defendants hoped to gain across-the-board immunity to antitrust law.
The NFL defendants argued that they were incapable of "conspiring" with respect to the exploitation of intellectual property rights because the NFL, its teams and the NFLP act as a "single entity." They contended that a decision otherwise "would convert every league of separately owned clubs into a walking antitrust conspiracy," and bring a legal challenge to any decision that the teams make collectively, such as scheduling or marketing.
Justice John Paul Stevens, who grew up as a sports enthusiast and began his career as an antitrust lawyer, authored the Supreme Court decision rejecting the NFL's position. Justice Stevens focused on whether the NFL was "independent centers of decision making" for its intellectual property. He concluded that the NFLP is simply an "instrumentality of the teams" because the teams were "separately controlled, potential competitors with economic interests distinct from NFLP's."
Justice Stevens explained that NFL teams directly compete against each other on numerous levels. Identifying Super Bowl XLIV competitors, the New Orleans Saints and the Indianapolis Colts, Justice Stevens noted that teams compete against each other "to attract fans, for gate receipts and for contracts with managerial and playing personnel." The teams compete in the market for intellectual property and, therefore, "[t]o a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks."
"Decisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that 'deprive the marketplace of independent centers of decision making...and therefore of actual or potential competition.'" Just because NFL teams may be members of an organization, the NFLP, to jointly market and license its brand and logos, does not mean the NFL can escape antitrust scrutiny. "If the fact that potential competitors shared in profits or losses from a venture meant that the venture was immune from" antitrust law, Justice Stevens wrote, "'then any cartel could evade the antitrust law simply by creating a 'joint venture' to serve as the exclusive seller of their competing products.'"
The Court also rejected the argument that NFL teams need each other to play an NFL season, analogizing "a nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to" antitrust scrutiny.
Win for the Fans
In American Needle, the Supreme Court ruled that the joint venture was not immune from the antitrust laws. There was no ruling about whether Section 1 had, in fact, been violated. Rather, the Court "punted" the case back to the lower court to consider whether the joint activity violates Section 1 under the "Rule of Reason." The NFL can still argue that the pro-competitive benefits of joint NFLP licensing outweigh the anti-competitive harms. Moreover, to prevail on remand, American Needle will have to prove, among other things, that the NFL has market power in a relevant market, such as licensing the use of trademarks and other intellectual property.
The implications of the Court's ruling are being widely speculated in the sports world and legal community. Had the NFL prevailed on its request for immunity in American Needle, the NFL might have sought to expand the immunity to areas such as ticket pricing and television viewing. As for the intellectual property licensing implications, the ruling may result in the lower court prohibiting the 32 NFL teams' joint venture to license and market their individually owned teams through a single entity.
The decision appears unlikely to have a significant impact on the NFL's press credential policies. The Court cited the NFL teams' shared "interest in making the entire league successful and profitable" as providing "a perfectly sensible justification for making a host of collective decisions."
The NBA, NHL, MLS, NASCAR and the NCAA publicly supported the NFL, hoping the high court would expand broad antitrust exemption to other sports. However, the Supreme Court's decision sends the message to these professional sports leagues that their own goals for single entity immunity will not materialize.
Perhaps the answer to "who wins when a football team plays itself?" is "the fans." In the end, by ruling against the most powerful sports league in the country, the country's highest court may have been looking out for the fans.