American Needle v. National Football League and the future of collective licensing agreements in sport.

Masteralexis, Lisa Pike

The U.S. Supreme Court's recent decision in American Needle v. National Football League is not the "death knell" of collective licensing agreements in sports, but it will hold the NFL and other professional sports entities (1) to a higher level of antitrust scrutiny than they had hoped. The issue in American Needle v. National Football League was whether the NFL's collective licensing arm, NFL Properties, LLC (NFLP), was a single entity, and therefore, exempt from antitrust liability under Section 1 of the Sherman Antitrust Act. Section 1 deems "[e]very contract, combination in the form of a trust or otherwise, or, conspiracy, in restraint of trade" illegal (Sherman Act, 2006). By ruling that the NFLP is not a single entity, but rather, a unit comprised of the 32 teams in the NFL, the Supreme Court took away the opportunity for the NFLP to operate exempt from Section 1 of the Sherman Antitrust Act. As a result, the NFLP's collective licensing activities will be evaluated under a rule of reason analysis, meaning that it will have to show the pro-competitive reasons for their exclusive apparel license with Reebok outweigh any anti-competitive impacts on the market.

Case History

From its founding in 1920 until 1963, individual teams in the NFL engaged in their own licensing of their team insignia (trademarks, logos, and colors) for apparel. In 1963, the NFLP was created to develop, license, and market their intellectual property. Between 1963 and 2000, NFLP granted non-exclusive licenses to numerous vendors to manufacture apparel with team marks, logos, and colors. In 2000, the NFL teams voted to allow NFLP to grant exclusive licenses. Embarking on the new exclusive rights strategy, the NFLP awarded Reebok a 10-year exclusive license for consumer headwear and clothing decorated with team logos and trademarks. The teams agreed amongst themselves and with Reebok, pursuant to this agreement that they would not compete with each other in the licensing of the headwear and clothing and that they would not permit any licenses to be granted to Reebok's competitors for the 10-year period. American Needle, a former headwear licensee for over 20 years, found itself out of the NFL market for a decade.

American Needle filed suit against the NFL and Reebok, alleging the exclusive licensing arrangement violated Section 1 of the Sherman Act. It was American Needle's contention that the NFL should be prohibited from granting an exclusive product license as such an agreement between its member teams constitutes a "combination, contract or conspiracy" in restraint of trade, with the net effect for the consumer being a reduction in choice and increase in price for league-branded apparel. The NFL argued it was immune from suit as a single entity. The district court looked to the Supreme Court's rejection of the concept of intraenterprise conspiracy in Copperweld Corp. v. Independence Tube Corp. (1984). In Copperweld, the Court ruled that a corporation and its wholly owned subsidiary are incapable of conspiring with each other under Section 1 of the Sherman Act. In doing so, Copperweld emphasized that function, not form, controlled. The district court opined that the proper analysis of Copperweld to a league situation might be that league-wide activities in all areas but labor relations are actions of a single entity; however, the district court did not want to go that far. Instead it looked to the Seventh Circuit's decision in Chicago Professional Sports Ltd. v. National Basketball Association (1996) ("Bulls II") and adopted a facet-by-facet analysis of league decision making to evaluate if the NFL was a single entity. Despite American Needle's best efforts to conduct broad discovery for documentation to disprove the NFL was a single entity, the District Court for the Northern District of Illinois granted summary judgment in favor of the NFLP, concluding that the NFL was a single entity, rather than a joint venture (American Needle v. New Orleans Saints, 2007).

On American Needle's appeal to the Seventh Circuit Court of Appeals, the NFL was victorious again. American Needle argued that the district court erred in finding the NFLP to be a single entity because the NFL teams do compete against each other in the licensing and marketing of their intellectual property and thus, they are not acting as a single entity. While not mentioned in the Seventh Circuit opinion, American Needle was likely referring to the following facts raised in its brief to refute the NFLP's single entity argument:

a. When NFLP was created in 1963 for purposes of selling a blanket non-exclusive license to manufacturers, teams retained ownership of their intellectual property;

b. In 1982, the NFL teams created the NFL Trust as a new joint mechanism to offer nearly exclusive licensing rights. However, the Miami Dolphins and Oakland Raiders opted not to participate and the Dallas Cowboys participated, but resisted the exclusivity of the arrangement;

c. The 1996 settlement resulting from the litigation between Cowboys owner Jerry Jones and the NFL over his rights to market the intellectual property of Dallas Cowboys;

d. The lack of shared revenue on products purchased in teams' pro shops. (Brief of Petitioner, 2009 at 3, 5-6).

In evaluating whether the league was a single entity, Circuit Court Judge Kanne noted that the court was entering "murky waters" because no court had yet "render[ed] a definitive opinion as to whether the teams of a professional sports league can be considered a single entity in light of Copperweld" (American Needle v. NFL, 2008 at 741). The characteristics that leagues exhibit make the determination difficult because in some contexts they appear to be a single entity and others appear to be a joint venture (Id.). (Single entities are exempt from Section 1 scrutiny while joint ventures are not). While the First Circuit had rejected the idea that a traditional sports league was a single entity in Fraser v. Major League Soccer, L.L.C., 284 F.3d 47, 55-56 (1st Cir. 2002)(citing Sullivan v. National Football League, 34 F.3d 1091, 1099 (1st Cir. 1994), the Seventh Circuit "embraced the possibility that a sports league could be a single entity under Copperweld in Bulls II" (Id. at 743). Thus, the Seventh Circuit affirmed the district court ruling following its suggestion in Bulls II that leagues be evaluated on a facet-by-facet basis. In compartmentalizing its review to the NFLP, the court rejected as "silly" and unrealistic American Needle's arguments that the teams were not a single source of economic power if they had any competing interests in the market. Stating, "though the several NFL teams could have competing interests regarding the use of their intellectual property that could conceivably rise to the level of potential intra-league competition, those interests do not necessarily keep the teams from functioning as a single entity" through the NFLP (Id. at 743 citing Bulls II at 597-98). Furthermore, the court stated that producing football games can only be carried out jointly and the "NFL teams share a vital economic interest in collectively promoting NFL football ... [to] compet[e] with other forms of entertainment for an audience of finite (if extremely large) size, and the loss of [that] audience impacts the individual teams' success." Id.

On May 27, the U.S. Supreme Court reversed the Seventh Circuit Court of Appeals and ruled that the NFLP was a not a single entity when promoting NFL football by licensing the teams' intellectual property (American Needle, 2010). Relying on Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 773, n. 21, the Court reiterated that "'substance, not form, should determine whether a[n] ... entity is capable of conspiring under section 1.' ... The key is whether the alleged 'contract, combination, ... or, conspiracy' is concerted action--that is whether it joins together separate decision makers." The Court found that each of the teams is a substantial, independently owned, and independently managed business and their objectives are not common. More specifically, the Court noted that NFL 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" (Id. at 9). The Court further explained that NFL teams do compete in the market for intellectual property, a fact directly relevant to the question of whether the NFLP is a single entity. It noted that "[t]o a firm making hats, the Saints and Colts are two potentially competing suppliers of valuable trademarks" (Id. at 12). Quoting Copperweld, it went on to state that "[d]ecisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that 'depriv[e] the marketplace of independent centers of decision making,' and therefore of actual and potential competition." (Id. at 12 citing Copperweld at 770). Just because NFL teams have common interests in promoting the NFLP brand, the Court viewed them as separate, profit-maximizing entities whose interests are not necessarily aligned. Furthermore, the Court noted that simply because the NFLP is a separate corporation with its own management and equal revenue sharing, it does not make it a single entity. Instead the Court stated the NFLP's licensing decisions are made by the 32 potential competitors, each of whom owns a share in the jointly managed assets. Citing Major League Baseball Properties, Inc. v. Salvino, 542 F, 3d 290, 335 (2d Cir. 2008), the Court stated that if the fact potential competitors created a joint venture to share in profits and losses would allow them to avoid Section 1 liability, "then any cartel could evade the antitrust law simply by creating a 'joint venture' to serve as the exclusive seller of their competing products." Id. at 17.

That said, the Court also emphasized that "[f]ootball teams that do need to cooperate are not trapped by antitrust law." Id. at 18. Citing his own dissent in Brown v. Pro Football, Inc., 518 U.S. 231, 252 (1996), Justice Stevens noted that the special characteristics of sport might provide justifications for many kinds of agreements, such as the need to cooperate in the production and scheduling of games. Id.

Marketing and Licensing Implications

The Supreme Court remanded the case to the district court for a trial consistent with its opinion that "the NFL's licensing activities constituted concerted action." Id. at 1. The district court has been instructed to examine American Needle's allegations of anti-competitive behavior under the rule of reason. The rule of reason defense provides flexibility in that it allows for restraints in the market, provided that they are reasonable. To evaluate if a restraint is reasonable, the rule of reason requires a court to balance the pro-competitive effects of the restraint against the anti-competitive impacts of the restraint. This means that if the NFLP can prove to the district court that their exclusive licensing deal with Reebok is more pro-competitive than anti-competitive, it will withstand judicial scrutiny.

Licensing is generally recognized as pro-competitive. For instance, Section 2.3 of the 1995 Antitrust Guidelines for the Licensing of Intellectual Property, issued jointly by the U.S. Department of Justice and the Federal Trade Commission recognizes the procompetitive benefits of licensing and promotes it as a means of increasing efficiency:

Licensing, cross-licensing, or otherwise transferring intellectual property can facilitate integration of the licensed property with complementary factors of production. This integration can lead to more efficient exploitation of the intellectual property, benefiting consumers through the reduction of costs and the introduction of new products. Such arrangements increase the value of intellectual property to consumers and to the developers of the technology.

The U.S. Supreme Court has recognized efficiency in use of blanket licenses to reduce costs by selling a few broad licenses rather than thousands of them, and to create more efficient systems for monitoring the use of the licenses (Broadcast Music, Inc. v. Columbia Broadcast Systems, 1979). Collective blanket licensing through the NFLP, or other professional sport licensing entities, such as league properties, ATP Tour or WTA properties, or the new NASCAR licensing trust, leads to efficiencies for manufacturers. For example, the manufacturers are able to avoid engaging in separate transactions with each entity for the use of their logos and trademarks. In the case of the NFLP, that would mean 32 separate transactions and negotiations, hardly a model of efficiency. This was a point raised in the brief of the respondent, Reebok International Limited and the amicus briefs of EA Sports and VF Imagewear, as they strongly advocated for the continued use of an integrated license for market efficiency and consumer welfare.

By remanding the case back to the district court, the Supreme Court has sought a trial on the merits as to whether the NFLP acted reasonably when it shifted its strategy from a few individual blanket licenses to apparel manufacturers to an exclusive rights deal with one manufacturer, Reebok. Naturally, this case will also impact its exclusive license with EA Sports for the simulated game market, so much is at stake. If it does not settle with American Needle, the onus will be on NFLP will be to show pro-competitive business justifications for their decision to offer an exclusive rights deal. Some of these justifications can be the concerns raised by EA Sports, VF Imagewear, and Reebok in their briefs. Among them are that licensees' costs are lowered in seeking one blanket license, thus allowing licensees to put more capital into research and development, as well as offering products at lower cost to consumers. In addition, the blanket license may spur licensees to take more risks in creating new and innovative products, due to the efficiency granted by the single, exclusive license. This view is consistent with the U.S. Department of Justice and Federal Trade Commission's stance on licenses to spur innovation and competition (2007).

As a licensor, the NFLP is free to grant licenses to any competitor or none at all. (Fleer v. Topps Chewing Gum, Inc., 1981). The NFLP can raise as justifications for their exclusive licensing deals the ability to control the quality, fit, and style of the products, as well as the need for unified branding. As a result, the court will likely need to examine the NFLP's motivation for the exclusive license. It need be more than simply that the NFLP wanted to drive the revenue it could command for its license up by creating an auction for an exclusive license.

Thus, organizations developing properties divisions in leagues or tours with a purpose of licensing collective non-exclusive rights need not panic about Section 1 antitrust liability. Properties groups need to think through the pro-competitive justifications for the licenses and particularly, if they chose a strategy of exclusivity, must be sufficiently confident that those pro-competitive justifications outweigh the restraints placed on competitors in the market for licensed products.

References

American Needle, Inc. v. National Football League, 538 F.3d 736 (7th Cir. 2008)

American Needle, Inc. v. National Football League, No. 08-661, 2010 WL 2025207, 560 U.S.--(2010)

American Needle v. New Orleans Saints, 496 F. Supp. 2d 941 (2007)

Brief for Electronic Arts, Inc., in support of respondents, No. 08-661 Retrieved from https://www.abanet.org/publiced/preview/briefs/pdfs/09-10/08-661_RespondentAmCuElectronicArts.pdf

Brief of Petitioner American Needle, Inc., No. 08-661 Retrieved from https://www.abanet.org/publiced/preview/briefs/pdfs/07-08/08-661_Petitioner.pdf

Brief of Respondent Reebok International Ltd., No. 08-661 Retrieved from http://www.abanet.org/publiced/preview/briefs/pdfs/09-10/08-661_RespondentReebokIntl.pdf

Brief for VF Imagewear, Inc. in support of respondents, No. 08-661 Retrieved from http://www.abanet.org/publiced/preview/briefs/pdfs/09-10/08-661_RespondentAmCuVFImagewear.pdf

Broadcast Music, Inc. v. Columbia Broadcast Systems, 441 U.S. 1 (1979)

Chicago Professional Sports Limited Partnership v. National Basketball Association, 95 F.3d 593 (7th Cir. 1996)

Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984)

Fleer v. Topps Chewing Gum, Inc., 658 F. 2d 139, 140, 150-54 (3d Cir. 1981) cert. denied 455 US 1019 (1982)

NFL Properties., Inc. v. Dallas Cowboys Football Club, Ltd., 992 F. Supp. 849 (S.D.N.Y. 1996)

Sherman Antitrust Act, 15 U.S.C. [section]1 (2006)

U.S. Department of Justice and Federal Trade Commission (April 6, 1995). Antitrust guidelines for the licensing of intellectual property. Retrieved from http://www.justice.gov/atr/public/guidelines/0558.htm

U.S. Department of Justice and Federal Trade Commission (April 2007). Antitrust enforcement and intellectual property rights: Promoting innovation and competition. Retrieved from http://www.justice.gov/atr/public/hearings/ip/chapter_4.htm#iv

Endnote

(1) Amicus briefs were filed in support of the respondents by the National Basketball Association and NBA Properties, National Hockey League, Major League Soccer, NASCAR, ATP Tour, and WTA Tour on the properties side. In addition, the respondents were also supported by EA Sports, VF Imagewear, and VISA and Mastercard on the licensee side.

DISCLAIMER: Inquiries regarding this feature may be directed to Lisa Pike Masteralexis at lpmaster@sportmgt.umass.edu. Anita M. Moorman, JD, is the editor of this section. She teaches sport law in the sport administration program at the University of Louisville. She can be contacted at amm@louisville.edu.

The materials in this column have been prepared for informational and educational purposes only, and should in no way be considered legal advice. You should not act or rely upon these materials without first consulting an attorney. By providing these materials it is not the intent of the authors or editors to enter into an attorney-client relationship with the reader. This is not a solicitation for business. If you choose to contact the authors or editors through e-mail, please do not provide any confidential information.

Lisa Pike Masteralexis, JD, is an associate professor of sport law and the head of the Department of Sport Management at the University of Massachusetts, Amherst. Her research interests include legal issues and labor relations in the sport industry.