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Supreme Court Subjects the NFL and Other Joint Ventures to Sherman Act Scrutiny
Supreme Court Subjects the NFL and Other Joint Ventures to Sherman Act Scrutiny
First published in Antitrust News & Notes, May 2010
By Nicole Glauser
On Monday, the United States Supreme Court for the first time in nearly 20 years found in favor of a private plaintiff in an antitrust appeal.1 In American Needle, the Court unanimously held that the NFL’s collective licensing activities constitute “concerted action” that is not unconditionally beyond the scope of Section 1 of the Sherman Act.2 The Court rejected the NFL’s claim that the League’s licensing activity is beyond the reach of Section 1 of the Sherman Act when NFL teams join in commercial activity and reversed the Seventh Circuit’s controversial decision that the League’s collective agreement to license an exclusive apparel vendor could not be challenged under antitrust laws.3 The Court then remanded the case for the lower court to determine whether the concerted action survived the rule of reason.4
Prior to the issuance of the Supreme Court’s decision, legal scholars and experts agreed that this case was of enormous significance to antitrust analysis of competitor collaborations both within and outside the realm of sports. Some commentators worried that a decision against American Needle would permit the NFL (and other pro leagues) to engage in joint commercial activity without regard to its effect on competition. Other commentators worried that a decision against the NFL teams could subject any legitimate internal decision the teams (or other kinds of joint ventures) make collectively to antitrust challenge. The Court appears to have carved out a middle ground. The Court clearly held that joint ventures are subject to Section 1 scrutiny, but also indicated that necessary competitive collaborations likely will be analyzed under the rule of reason and that legitimate internal decisionmaking by such entities or groups of entities and agreements that do not eliminate independent decisionmaking from the market are not subject to Section 1 attack.
Background
The dispute between American Needle, an apparel manufacturer, and the NFL arose in 2002, after the NFL did not renew American Needle’s nonexclusive license to use NFL and team trademarks on headwear (e.g., knit hats and baseball caps).5 Instead, the NFL through its affiliate, NFL Properties, Inc., entered into an exclusive apparel licensing deal with Reebok International.6
After its license was not renewed, American Needle responded by filing an antitrust action against the NFL, its teams, NFL Properties, and Reebok, alleging, among other claims, violations of Section 1 of the Sherman Act, which makes “[e]very contract, combination . . . or, conspiracy, in restraint of trade” illegal.7 American Needle claimed that each of the 32 individually incorporated NFL teams separately owned its own name, colors, logo, trademarks, and related intellectual property, and therefore the teams’ “collective agreement to authorize NFL Properties to award the exclusive headwear license to Reebok was, in fact, a conspiracy to restrict other vendors’ ability to obtain licenses for the teams’ intellectual property” in violation of Section 1.8 The NFL argued that it is a single entity with 32 teams that compete with each other in football but not with respect to the challenged conduct and thus was immune from Section 1 liability.9
Relying on circuit precedent, the Seventh Circuit explained that “the question of whether a professional sports league is a single entity should be addressed not only ‘one league at a time,’ but also ‘one facet of a league at a time.’”10 The court concluded that, in the context before it, since “[c]ertainly the NFL teams can function only as one source of economic power when collectively producing NFL football,” it “follows that only one source of economic power controls the promotion of NFL football” through licensing.11 The Seventh Circuit further noted that, since 1963, NFL teams “license[d] their intellectual property collectively.”12 The court then held that the NFL teams constitute a single entity for the purpose of licensing their intellectual property, and thus Section 1 of the Sherman Act did not apply.13
Analysis
The Supreme Court unanimously found the Seventh Circuit’s reasoning “unpersuasive” and reversed.14 Writing for the Court, retiring Justice John Paul Stevens (formerly an antitrust lawyer) described that, unlike Section 2, which covers both concerted and independent action if that action monopolizes or threatens actual monopolization, Section 1 applies only to concerted action that restrains trade.15 The Court emphasized that the inquiry into whether an entity is capable of conspiring under Section 1 is based on “substance, not form,” and thus it “does not turn simply on whether the parties involved are legally distinct entities” or whether “two legally distinct entities have organized themselves under a single umbrella or into a structured joint venture.”16 Instead, the key question in determining whether a “contract, combination . . . or, conspiracy” falls within Section 1 is whether the challenged arrangement “embod[ies] concerted action;” that is, does it “join[] together separate decisionmakers” or “independent centers of decisionmaking.”17 “If it does, then entities are capable of conspiring under Section 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one.”18
Applying this inquiry to the NFL teams’ collective licensing of intellectual property, the Court held that, “[a]lthough NFL teams have common interests such as promoting the NFL brand, they are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned.”19 Indeed, “the teams compete in the market for intellectual property.”20 Citing the two teams in this year’s Super Bowl, Justice Stevens wrote: “To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks.”21 As a result, “[w]hen each NFL team licenses its intellectual property, . . . [it is] acting as [a] separate economic actor[] pursuing separate economic interests, and each team therefore is a potential independent center of decisionmaking.”22 Therefore, the Court held, “[d]ecisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that deprive the market place of independent centers of decisionmaking and therefore of actual or potential competition.”23
The Court rejected as unpersuasive the argument that the NFL teams need each other to plan an NFL season, stating that “a nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to Section 1 analysis.”24 The Court rejected as irrelevant the fact that the NFL teams shared in profits and losses from NFL Properties, describing that holding otherwise could permit “any cartel [to] evade the antitrust law simply by creating a ‘joint venture’ to serve as the exclusive seller of their competiting products.”25 The Court also found irrelevant the fact that since 1963, NFL Properties had “served as the ‘single driver’ of the teams’ promotion vehicle, pursuing the common interests of the whole,” stating that “a history of concerted activity does not immunize conduct from Section 1 scrutiny.”26
The Court also rejected an alternate test for identifying a single enterprise proposed by the Solicitor General and the Department of Justice.27 In an amicus curiae brief, the Government suggested that it would treat a joint venture as a single enterprise when the venturers “‘have effectively merged the relevant aspect of their operations, thereby eliminating actual and potential competition in that operational sphere’ and ‘the challenged restraint does not significantly affect actual . . . or potential competition outside their merged operations.’”28 Under this test, the Government argued, the NFL’s choice to “‘offer only a blanket license’ and ‘to have only a single headwear licensee’ might not constitute concerted action.”29 But the Court pointed out that this test impermissibly elevates form over substance, because “[t]he two choices that the Government might treat as independent action, although nominally made by [NFL Properties], are for all functional purposes choices made by the 32 entities with potentially competing interests.”30
Seeking to allay concerns that may be raised by its ruling, the Court explained that competitor collaborations, like that among the NFL teams, “that need to cooperate are not trapped by antitrust law.”31 For example, “[t]he fact that NFL teams share an interest in making the entire league successful and profitable, and that they must cooperate in the production and scheduling of games, provides a perfectly sensible justification for making a host of collective decisions,” even though the challenged conduct “is still concerted activity under the Sherman Act that is subject to Section 1 analysis.”32 Thus, because some restraints on competition may be necessary among athletic teams, including the teams in the NFL, the rule of reason generally applies, and the challenged conduct may be permissible.33
The Court ultimately remanded this case back to the lower court for consideration of whether and to what degree, in light of all the circumstances, the NFL’s grant of an exclusive license to market NFL-branded apparel is anticompetitive.34 An analysis, the Court perhaps hinted, that might be applied to the NFL without detailed analysis but instead “in the twinkling of an eye.” 35
For more information, please contact Vinson & Elkins lawyer Nicole Glauser. Visit our website to learn more about V&E's Antitrust practice. Get a .pdf of this issue of Antitrust News & Notes e-newsletter here.
1Am. Needle, Inc. v. Nat’l Football League et al., ____ U.S. ___, 2010 WL 2025207, at *3 (2010).
2Id.
3Id. at **3-4.
4Id. at *13.
5Id. at *4.
6Id.
7Id. at *4; see also 15 U.S.C. § 1.
8Am. Needle v. Nat’l Football League, 538 F.3d 736, 738 (7th Cir. 2008); see also Am. Needle, 2010 WL 2025207, at *4.
9Am. Needle, 2010 WL 2025207, at **4, 10.
10Am. Needle, 538 F.3d at 742 (citations omitted); see also Am. Needle, 2010 WL 2025207, at *4.
11Am. Needle, 538 F.3d at 743.
12Id. at 744.
13Id.
14Am. Needle, 2010 WL 2025207, at **3, 10, 13.
15Id. at *5.
16Id. at **6, 9.
17Id. at **8-9 (citing Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 769, 773 n.21 (1984)).
18Id. at *9.
19Id. at *10.
20Id. at *9.
21Id.
22Id. (quotations omitted).
23Id. (quotations omitted).
24Id. at *11.
25Id. at *12 (quotations omitted).
26Id. at *10.
27Id. at *12 n.9.
28Id. (quoting Brief for the United States as Amicus Curiae at 17) (alterations omitted).
29Id. (quoting Brief for the United States as Amicus Curiae at 32).
30Id.
31Id.
32Id.
33Id. at *12; see also id. at *3.
34Id. at *13.
35Id. at *12.
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