The NFL’s Licensing Play Under Further Review: A Summary of the Supreme Court Oral Argument in American Needle v. NFL
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On January 13, 2010, the United States Supreme Court heard 70 minutes of oral arguments in American Needle, Inc. v. NFL. At issue was whether the National Football League ("NFL") and the its 32 teams constitute a "single entity" exempt from Section 1 of the Sherman Act. Section 1 prohibits separate entities from taking concerted action that unreasonably restrains trade. The concerted action with which the American Needle case is concerned is an agreement by the NFL and its teams to exclusively license their collective intellectual property to Reebok-a competitor of the NFL's former headgear licensee and plaintiff, American Needle, Inc. If while exclusively licensing, the NFL and its teams acted collaboratively, as opposed to as a "single entity," they may have run afoul of Section 1. The Supreme Court's line of questioning at oral arguments suggests that some Justices may have discomfort about the granting of Section 1 immunity to the NFL and its teams. This article summarizes the case's history and analyzes the oral arguments made before the Supreme Court by American Needle, the Solicitor General, and the NFL.
Background of American Needle v. NFL:
American Needle sued the NFL, NFL member football teams, NFL Properties, and Reebok International Ltd. ("the Defendants"), alleging that the grant by the NFL of an exclusive 10-year headgear license to Reebok is an unreasonable restraint on trade that violates the antitrust laws. The NFL is an unincorporated association of 32 separately owned and operated football teams which, as a group, produce over 250 interrelated NFL football games annually. Although the football teams are separately owned and incorporated, they note that no single team can put on a single football game by itself, much less an entire season culminating in the sports and marketing bonanza that is the Super Bowl.
In 1963, the NFL teams formed NFL Properties to collectively license their intellectual property and promote NFL football. Shortly after its formation, NFL Properties granted headwear licenses to several different vendors-one of which was American Needle. American Needle held its license from the NFL for over twenty years. But in 2001, after the NFL teams permitted NFL Properties to solicit bids for an exclusive headwear license, American Needle and others lost their headwear contracts when the NFL granted an exclusive 10-year license to Reebok.
American Needle reacted by suing the Defendants, claiming that the exclusive Reebok licensing agreement among the 32 individual NFL teams was a conspiracy to restrict competing vendors from using team trademarks, unreasonably restraining trade in violation of Section 1 of the Sherman Act. American Needle further claimed that the Reebok licensing agreement monopolized the use of NFL teams' intellectual property in violation of Section 2 of the Sherman Act.
The United States District Court for the Northern District of Illinois granted summary judgment in favor of the NFL on both the Section 1 and Section 2 claims. The Seventh Circuit unanimously affirmed. In affirming, the Seventh Circuit assumed that the licensing of headwear was an integral part of promoting NFL football. Because the promotion of NFL football cannot be performed by any one team, the court reasoned that joint licensing did not deprive the market of an "independent source of economic power." Thus, the court applied the Supreme Court's precedent in Copperweld to conclude that the NFL teams were a "single entity" when they jointly licensed products through NFL Properties. In a remarkable move, both parties sought review by the United States Supreme Court and the Court granted certiorari on June 29, 2009. A decision on the matter is expected in late June 2010.
Predicting the Supreme Court's decision is always difficult, but the Justices' line of questioning suggests that it is not visibly comfortable in affirming a grant of Section 1 immunity to the NFL and its teams. The Justices' questions indicate that there may be a consensus in favor of not holding in favor of either party.
The Line of Questioning Tests the Antitrust Boundaries for Sports Leagues
American Needle generally argued that the exclusive Reebok licensing agreement is an unfair collaboration among the 32 NFL teams that should be competing both on and off the field. Specifically, it argued that the NFL should rarely be treated as a single entity. Chief Justice Roberts, and Justices Breyer, Scalia, and Sotomayor responded to this argument by directing questions to the NFL on why the NFL should be treated differently than other joint ventures routinely subject to Section 1 scrutiny.
The Justices tested the antitrust boundaries of the NFL's business by posing hypotheticals to each party. Justices Alito, Ginsburg, and Kennedy focused on whether basic NFL rules should be subject to antitrust scrutiny. Justice Kennedy, for example, asked whether an agreement to provide additional protection to a quarterback made among the 32 teams through the NFL should be subject to Section 1 because it benefits teams unequally based on their game plans. Justice Alito and Justice Sotomayor followed by inquiring whether the NFL may prevent teams from playing games other than those on the NFL's schedule or from joining leagues besides the NFL.
In considering whether a Section 1 exemption is justified, Justice Breyer stated that he understood the cooperation required to produce the football game but questioned the need for such cooperation to sell logoed hats off the field. Justice Breyer later argued that it is unlikely that NFL teams could compete with each other in selling apparel because when it came to baseball, "I don't know a Red Sox fan who would take a Yankees sweatshirt if you gave it away."
Justice Sotomayor seemed to question whether a Section 1 exemption is needed, by requesting examples of the types of decisions the teams could make that would be subject to the antitrust scrutiny under the NFL's definition of joint venture activities. The NFL responded that the teams should not be allowed to agree on uniform wages for secretaries. As the NFL was asserting that it is a single entity, Justice Sotomayor interrupted to recognize that the NFL was seeking from the Court what Congress would not provide -absolute immunity from Section 1 antitrust claims. The Court seemed to struggle understanding the NFL's argument that the teams have no value without the league and thus the teams and its league should be considered a single entity. This argument prompted Justice Scalia to inquire whether the teams' ability to act collectively extends to: "fix[ing] the price at which their franchises will be sold, by concerted agreement, because after all, they are worthless apart from the NFL?" The NFL answered, "Yes," and Scalia noted his surprise by saying that he "thought [he] was reducing it to the absurd."
These questions and remarks suggest that the Justices may view the NFL's Section 1 classification as ambiguous and dependant on context and the nature of the collective action taken. Moreover, the Court may be concerned that the teams' cooperation is treading away from the narrower goal of producing a football game. These questions indicate the Court is uncertain and skeptical of both sides' argument.
The Court Questions the Purpose for Selling Logoed Products
The Court inquired into the connection between various types of commerce conducted jointly and the game of football itself, possibly hinting that an attenuated connection weighed against Section 1 immunity. Some Justices questioned the NFL's claim that the purpose of helmet and t-shirt sales is only to promote the game. Specifically, the NFL argued that the league and its teams should be considered a single entity because the NFL is a product that can only be created by a series of agreements among its teams. Furthermore, the NFL asserted that no individual team can produce this product on its own. The Justices reacted by asking whether NFL Properties was originally formed to sell hats and whether some centralized entity always licensed all the teams' trademarks or if at some time this task was left to each team individually. Meanwhile, Justice Scalia tried to understand that merchandising deals are made for the sole purpose of promoting the sport, by remarking that "the purpose is to make money. I don't think that they care whether the sale of the helmet or the T-shirt promotes the game." He further said that the stated purpose of promoting the game versus making money could be a triable issue. Justice Sotomayor showed some agreement with Justice Scalia and went on to state that "once you fix prices for making money, that's a Sherman Act violation." Justices Sotomayor and Scalia questioned the stated purpose for selling logoed products.
Will the Justices Punt Back to the Seventh Circuit?
Some of the Court's questions indicate that it may consider remanding the case for a rule of reason analysis under Section 1. Although some Justices appeared unsure who will ultimately prevail in the antitrust suit, they appeared open to the idea of a trial. Chief Justice Roberts and Justice Sotomayor asked the Solicitor General Malcolm L. Stewart how he would analyze this situation under the single control theory and the rule of reason. Mr. Stewart argued that the courts will need to decide on a case-by-case basis whether antitrust exemptions for particular business activities are justified. This approach in general would subject the sports leagues' conduct to a rule of reason analysis to determine whether the proposed activity or restriction is essential to the sport's success. Additionally, his argument suggests that the Court should remand to permit American Needle to attempt to prove its antitrust claim.
Justice Stevens questioned whether this case would be different if the licensing agreement was with multiple vendors as opposed to exclusively with Reebok. The Solicitor General responded that a court could consider that question on remand under the rule of reason. The NFL countered that case-by-case determinations of Section 1 liability would impose a costly burden on the NFL with court and legal fees. Despite the cost concerns, the Court's questions show that it may consider remanding the case.
The Supreme Court's line of questioning at oral arguments suggested it is not immediately comfortable with affirming a grant of Section 1 immunity to the NFL and its teams based on the record before it. Rather, the Court's questioning suggested it may remand the case with clarifying instructions. Further, these substantive questions and remarks show that the Court struggles with the connection between the challenged joint activities and the core game of football. For resolution of these questions - and their impact on joint ventures outside of professional sports - we will await the Court's final decision.
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