Supreme Court Rules Against NFL, Allows Antitrust Case to Proceed

On May 24, 2010, in a highly anticipated sports law decision, the U.S. Supreme Court reversed a decision of the Seventh Circuit Court of Appeals, unanimously ruling against the National Football League in its bid to be viewed as a single entity exempt from antitrust scrutiny. In American Needle, Inc. v. Nat’l Football League, the Supreme Court held that the NFL’s conduct relating to the licensing of team trademarks and other intellectual property constituted concerted action of the type within the scope of Section 1 of the Sherman Act, thus rejecting the NFL’s attempt to broadly immunize itself from antitrust liability and allowing apparel-maker American Needle to proceed with its antitrust claim against the league.

The Supreme Court’s reversal of the Court of Appeals’ decision means that on remand, the NFL will have to defend against American Needle’s antitrust claim under the Rule of Reason by showing that the pro-competitive benefits of its exclusive licensing agreement with Reebok outweigh any anti-competitive harms.

Background

The NFL is an unincorporated association of 32 separately owned teams. In 1963, the teams formed a separate corporate entity, NFL Properties, to license and market league and team intellectual property and to advertise and promote the sport of football. For years, NFL Properties simultaneously granted non-exclusive headwear licenses to numerous vendors, including American Needle, to manufacture and sell hats bearing NFL team logos. In 2001, NFL Properties granted an exclusive 10-year headwear license to Reebok International Ltd. and did not renew American Needle’s license, thus shutting American Needle out of the NFL hat market. American Needle thereafter filed an antitrust suit against the NFL, NFL Properties and Reebok alleging violation of Section 1 of the Sherman Act.

Under federal antitrust law, specifically Section 1 of the Sherman Act, competitors generally cannot conspire in ways that impair competition or harm consumers, be it in terms of increased prices or limited choices. If they conspire, they are subject to Section 1 analysis, which, other than for certain kinds of hard core violations that are per se illegal, balances pro and anti-competitive effects under a “Rule of Reason” standard. Courts also generally apply the Rule of Reason in analyzing the competitive effects of legitimate joint ventures among competitors.

In its suit, American Needle argued that an exclusive contract for NFL apparel shuts out American Needle and other apparel companies from negotiating with individual NFL teams and meant that Reebok, without competition from those other companies, could charge higher prices. American Needle claimed this type of concerted action violated Section 1 of the Sherman Act. The NFL, on the other hand, argued that although it is comprised of separately owned and competing teams, the common purpose of the teams and league made them a “single-entity” which is exempt from Section 1 of the Sherman Act because a single entity cannot conspire with itself. The lower courts (the Northern District of Illinois and the Seventh Circuit Court of Appeals) agreed with the NFL, finding that the teams, the league and NFL Properties collectively functioned as a single entity and held that Section 1 thus did not apply to the parties. American Needle appealed the lower court ruling to the Supreme Court.

The Supreme Court’s Decision

The Supreme Court addressed the narrow question of whether the NFL parties collectively function as a single entity. Section 1 of the Sherman Act requires multiple actors for there to be concerted action. If the NFL, its teams and NFL Properties were determined to be a single entity, they could not be subject to scrutiny under Section 1, and American Needle could not move forward with its antitrust claim.

In undertaking the single entity analysis, the Court emphasized that a finding of concerted action “does not simply turn on whether the parties involved are legally distinct entities” versus a single entity, but rather demands a “functional consideration” of how the parties actually operate. Using this substance over form analysis, the Court focused on whether the parties are separate decision makers that may compete with each other (which would subject them to antitrust scrutiny under Section 1) or whether the parties are controlled by a single decision maker and operate under a single aggregation of economic power (in which case they would be immune from Section 1).

Applying the specific facts for the NFL parties, the Court observed that the league’s teams “compete with one another, not only on the playing field, but to attract fans, for gate receipts and for contracts with managerial and playing personnel.” The Court also noted that, specific to the American Needle case, the “the teams compete in the market for intellectual property.” Based on these factors, the Court determined the NFL parties did not constitute a single entity because they did not possess the “unitary decision making quality or the single aggregation of economic power” required for independent action. Accordingly, the Court held the NFL was not immune from antitrust scrutiny under Section 1 of the Sherman Act and remanded the case to the lower court for further proceedings.

What’s Next?

On remand, the Supreme Court has directed the Court of Appeals to apply the flexible “Rule of Reason” analysis to determine whether the pro-competitive benefits of NFL Properties’ grant of an exclusive apparel license to Reebok outweigh any anti-competitive harms. The Supreme Court made clear that the Rule of Reason analysis was appropriate to apply to the NFL given its status as a joint venture that requires substantial cooperation among the NFL teams to produce a product at all. The Supreme Court noted that “[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.” The Supreme Court further noted that it was not clear that IP licensing fell into that category of conduct necessary to produce NFL football. Ultimately, whether American Needle meets its burden to show that the conduct it challenges is unlawful will depend on the facts and expert testimony that the parties provide to the District Court on the procompetitive and anti-competitive effects of the exclusive licensing arrangement being challenged.