To license or not to license: that is the question for professional sport leagues and the NCAA.

Moorman, Anita M. ; Hambrick, Marion E.

Three recent cases that are currently pending in federal courts assert a variety of legal theories and, at first glance, may seem to bear no connection. However, a common thread links all three legal challenges: the business activity of licensing. These three cases, one of which will soon be heard by the United States Supreme Court, have the potential to dramatically affect licensing practices in both professional and collegiate sport. When one thinks of the sport licensing industry, the first thought may be of T-shirts, jerseys, and coffee mugs emblazoned with familiar names, logos, and mascots. The sport licensing industry ranks as one of the top revenue producers in the licensing world. However, as sport licensing has grown, it has also become more sophisticated, extending into goods and services well beyond the traditional T-shirt, jersey, or branded collectible item (International Licensing Industry Merchandisers' Association, 2009).

Revenues from global licensed sports apparel and other goods grew by $3.1 billion in 2008 to $19.9 billion, according to the market research firm's annual estimate (Johnson, 2008). Sports leagues and other sports-related companies garnered five of the top 20 spots among leading global licensors. MLB registered $5.1 billion in global sales, followed by the NFL ($3.4 billion), the NBA ($3 billion), the Collegiate Licensing Co. ($2.5 billion), and NASCAR ($2 billion) (Johnson, 2008). Initially, the United States sport licensing business was dominated by the four major sports leagues--National Football League, Major League Baseball, National Basketball Association, and the National Hockey League (International Licensing Industry Merchandisers' Association, 2009). Each of those leagues runs certain licensing activities on behalf of its teams out of a centralized league office. The centralization of certain licensing practices for the professional leagues is the critical focus of the case currently pending before the United States Supreme Court, American Needle v. National Football League (2009).

Other sport organizations also have significant licensing deals now such as NASCAR, the U.S. Olympic Committee, and the National Collegiate Athletic Association (NCAA) (International Licensing Industry Merchandisers' Association, 2009). In addition, more than 300 colleges and universities in the U.S. operate licensing programs, marketing their rights primarily to the apparel and novelties markets. Similar to the centralization of licensing activities among the major sport leagues, the NCAA also conducts a number of licensing programs beyond promoting NCAA championships and events. These licensing activities of the National Collegiate Athletic Association are the target of two pending cases against the NCAA, Electronic Arts, Inc. (EA), and the Collegiate Licensing Company (CLC) (Keller v. Electronic Arts, Inc. (2009); O'Bannon v. NCAA (2009)).

The following three cases illuminate challenges currently facing the sport licensing segment in both collegiate and professional sport related to publicity rights and managing intellectual property rights.

Licensing Litigation and the NCAA

In Keller v. Electronic Arts, Inc. plaintiff Sam Keller filed a class action lawsuit against EA, the NCAA, and CLC. The lawsuit focuses on the rights of publicity for student-athletes governed by the NCAA. Keller played football for Arizona State University and the University of Nebraska. He argues the defendants used the likenesses of student-athletes inappropriately and deprived them of associated benefits.

Electronic Arts is a software company based in Redwood City, California, and develops and sells sports-related video games. Popular titles include NCAA Football, NCAA Basketball, and NCAA March Madness. The video games showcase competitions between opposing teams and are known for their realistic depiction of sporting events. Keller argues EA violated NCAA Bylaw 12.5, which "specifically prohibits the commercial licensing of an NCAA athlete's 'name, picture, or likeness'" (p. 4) and the NCAA allows the software company to do so without penalty. The video games use jersey numbers rather than names to distinguish players. Yet the plaintiff argues even without names, players can be readily identified by their physical attributes and equipment preferences (e.g., helmet visors and headbands). Additionally, video game consumers can upload player names from various websites. Once an upload is complete, actual player names are integrated throughout the game, including on player jerseys and during the audio play-by-play.

Keller's complaint asserts seven causes of action against EA, CLC, and the NCAA. The first three address the deprivation and violation of rights of publicity by the three organizations. Keller asserts the defendants used student-athlete "names, voices, signatures, photographs, images, likenesses, distinctive appearances, gestures, and mannerisms" (p. 17) for commercial gain and without proper consent from the athletes. Keller contends a civil conspiracy and unfair competition violations exists as the defendants use the student-athlete likenesses to their advantage while limiting benefits received by the class members. Keller also argues the NCAA breached its contractual obligations to student-athletes for failing to protect them from said deprivations and violations. Finally, Keller alleges unjust enrichment by EA, which profits from the software sales at the expense of student-athletes. On behalf of all class members, Keller has demanded actual damages, statutory damages, punitive damages, disgorgement of profits, and permanent enjoinment of using student-athlete likenesses in the future (Keller v. Electronic Arts, Inc, 2009).

In a second case, O'Bannon v. NCAA, Edward O'Bannon, a former basketball player, filed a class-action lawsuit against the NCAA and CLC, asserting unreasonable restraint of trade under the Sherman Antitrust Act. O'Bannon filed on behalf of himself and former student-athletes who played in the NCAA's Division I basketball and Football Bowl Subdivision.

O'Bannon played basketball for the University of California-Los Angeles. Like all student-athletes, he was required to sign NCAA Form 08-3a, stating he would not violate the NCAA's amateur status rules by receiving compensation for the "name, visual likeness ... voice, photograph, signature or physical mannerisms" (p. 7). O'Bannon acknowledges the spirit of amateurism for student-athletes while they attended school but argues the agreement binds them beyond their collegiate careers. The same form permits the NCAA and related third parties to use a student-athlete's image to publicize NCAA-sanctioned events. However, the plaintiff argues the NCAA, colleges and universities, and commercial partners benefit unfairly from the agreement as they sell television broadcasts rights, photographs, and apparel featuring the athletes. Similar to Keller, the O'Bannon suit specifically mentions EA for the revenues generated from sports video game sales and CLC for its sales of other licensed merchandise. The organizations accrue profits while the athletes are students and continue to do so after they have graduated. The NCAA treats the student-athlete consent form as operating "in perpetuity" long after the student-athlete has left the university (O'Bannon v. NCAA, 2009, p. 5).

Citing the Sherman Antitrust Act, O'Bannon asserts multiple causes of action against the defendants, including unreasonable restraint of trade, group boycott, and refusal to deal. O'Bannon argues the NCAA and CLC manage the licensing and contractual agreements, the number of licenses sold and price, and ensure current and former student-athletes never participate in negotiations. The defendants are unjustly enriched, according to O'Bannon, whereby the NCAA, CLC, and others receive compensation for the sales of student-athlete merchandise without compensating the athletes for the value they afford the related licenses and products. The plaintiff has asked for accounting of receipts to determine exactly how much the NCAA and other organizations benefit from the sales, assess damage amounts, and compensate class members for their losses. Like Keller, O'Bannon seeks damages, disgorgement of profits, and a permanent injunction. However, unlike Keller, O'Bannon's remedy is targeting former student-athletes, rather than current student-athletes.

While both of these cases are in the early stages of litigation, the potential impact is quite significant. Keller alleges the NCAA's 2008 revenues were $614 million and EA's 2008 fiscal year revenues were $3.67 billion. None of the video game-related revenue is being paid to the individuals whose likenesses are featured in the games. If Keller's request to establish a class of potential plaintiffs succeeds, the damages requested could be in the millions (Rodenberg, 2009). As a point of reference, the NFL Players Association settled a lawsuit in June 2009 with retired players who claimed they were not compensated for their likenesses on EA's Madden NFL video game. The payout was $26.3 million to more than 2,000 retirees. The NCAA has many, many, many more players featured in EA's NCAA Football and Basketball video games (Harry, 2009).

Similarly, the stakes of O'Bannon v. NCAA are substantial. If O'Bannon and former student-athletes prevail or receive a favorable settlement, the NCAA, along with its member conferences and schools, could be required to pay tens of millions, if not hundreds of millions, of dollars in damages--particularly since damages are trebled under federal antitrust law (McCann, 2009). These decisions could alter the current landscape of amateurism in collegiate sport and could be the first step toward compensating student-athletes on some level. The marketplace for goods may change as well, with potentially more competition over the identities and likenesses of former college athletes.

Professional Sport Leagues and Licensing Practices Litigation

In American Needle, Inc. v. New Orleans Louisiana Saints, et al., American Needle, Inc. sued the National Football League, its member football teams, and NFL Properties LLC, along with Reebok International Ltd. ("Reebok"), alleging the teams' exclusive licensing agreement with Reebok violated the Sherman Antitrust Act. See 15 U.S.C. [sectiomn][section] 1-2.

For several years, NFL Properties granted headwear licenses to a number of different vendors simultaneously. One of those vendors was American Needle, which held an NFL headwear license for over 20 years. In 2000, the NFL teams collectively authorized NFL Properties to solicit bids from the vendors for an exclusive league headwear license. Reebok won the bidding war, and in 2001 the NFL teams allowed NFL Properties to grant an exclusive license to Reebok for 10 years. NFL Properties thus did not renew American Needle's headwear license or the licenses of the other headwear vendors. American Needle responded to the loss of its headwear license by filing an antitrust action against the NFL, NFL Properties, the individual NFL teams, and Reebok.

American Needle claimed the exclusive headwear licensing agreement between NFL Properties and Reebok violated [section] 1 of the Sherman Antitrust Act (15 U.S.C. [section] 1). Section 1 of the Sherman Act states that any "contract, combination ... or conspiracy in the restraint of trade or commerce ... is declared to be illegal." The single entity exemption provides that where the only defendant to a Section 1 suit is a single entity, a conspiracy in restraint of trade cannot exist. Basically one can not conspire with oneself. However, as American Needle saw it, because each of the individual teams separately owned their team logos and trademarks, their 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.

The NFL moved for summary judgment on the antitrust claims, asserting that when the teams agreed to allow NFL Properties to exploit their various intellectual property rights, the NFL and its 32 teams were acting as a single entity and therefore not subject to Section 1 of the Sherman Act. The district court concluded that with regard to the licensing facet of the NFL and its teams' operations, they have become so integrated their joint operations should be deemed those of a single entity rather than joint venture[rs] cooperating for a common purpose (American Needle, Inc. v. New Orleans Louisiana Saints, 2007). The district court relied in part on Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), in which the Supreme Court held that a parent corporation and its wholly owned subsidiary are a single entity for antitrust purposes.

American Needle appealed to the Seventh Circuit Court of Appeals. The court of appeals noted it had yet to decide whether the teams of a professional sports league can be considered a single entity in light of Copperweld. The court explained that "in some contexts, a league seems more like a single entity immune from antitrust scrutiny, while in others a league appears to be a joint venture between independently owned teams that is subject to antitrust scrutiny" (p. 74). Citing its decision in Chicago Professional Sports Ltd. Partnership v. NBA, 95 F.3d 593 (7th Cir. 1996) (Bulls II), the court of appeals held that "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'" (p. 742). The court, therefore, only considered the actions of the NFL, its members' teams, and NFL Properties with regard to the teams' agreement to license their intellectual property collectively via NFL Properties. On August 18, 2008, the Seventh Circuit agreed with the district court and ruled that NFL teams act as a single entity "when promoting NFL football through licensing teams' intellectual property" and are, therefore, not subject to scrutiny under Section 1 of the Sherman Act (American Needle v. National Football League, 2008). American Needle next sought certiorari from the United States Supreme Court, and the Supreme Court granted certiorari on June 29, 2009. The case should be heard before the Supreme Court sometime in late 2009 or early 2010.

This case is of course significant for antitrust and labor lawyers and has already been extensively examined in the legal literature (see Edelman, 2008; Grow, 2008; McKeown, 2009; Paolino, 2009), but it has practical significance for sport managers as well. Between the years 1982 and 2006, the NFL clubs raised the single-entity defense at least seven times with the reviewing court rejecting the defense each time (Edelman, 2009). However, since the Seventh Circuit decision, leagues undoubtedly feel more freedom to act collectively as they explore new and innovative licensing, marketing, and sponsorship deals.

For example, Topps and Major League Baseball recently announced on August 6, 2009, an exclusive deal starting in 2010 to make Topps the sole licensed producer of baseball cards (Sandomir, 2009). The deal will return baseball cards to the era of exclusivity enjoyed by Topps for many years. Although Upper Deck still has a deal with the Players Association, it will lose access to the trademarks and logos of Major League Baseball. Major League Baseball has similarly established exclusive league-wide licensing or sponsorship deals with other companies. For example, Chevrolet (official car), MasterCard (credit card), Pepsi (soft drink), and New Era (cap) already have exclusive deals. For that reason, MLB's Executive Vice President Tim Brosnan said baseball does not believe there are antitrust implications in entering a similar deal with Topps. Brosnan said the American Needle decision that backed the NFL's right to make Reebok its exclusive headwear sponsor affirmed baseball's policy (Sandomir, 2009).

On the other side of this equation, as the SportsBusiness Journal recently reported, a number of companies are developing new online video sports games without licensing deals from the sports leagues. Quick Hit, Inc. acknowledged it would like to have a license, but obtaining one is unlikely and "definitely, not the end of the world" (Fisher, 2009). The Eighth Circuit Court of Appeals decision that allowed C.B.C. Distribution and Marketing, Inc., to continue operating its fantasy sports leagues without a league license or permission from players has emboldened some companies (see C.B.C. Distribution & Marketing, Inc. v. Major League Baseball Advanced Media, L.P., 2007; Grady, 2007). Another unlicensed entrant is a street basketball video game from a South Korean developer and the Midway "Blitz" football game recently acquired by Warner Bros. as part of Midway's bankruptcy proceeding. Even EA Sports, which has many official licensing deals with major league sports and the NCAA, chose to develop a mixed martial arts game without UFC licensing. Instead, EA is pursuing licensing with individual fighters (Fisher, 2009).

Summary

As these cases wind their way through the legal system, the NCAA must revisit the delicate balance it believes it has achieved between preserving amateurism, and avoiding exploitation and over-commercialization of student-athletes and maintaining its vital revenue producing activities, including licensing student-athletes' names, image, likeness, or other aspects of identity. Similarly, the myriad of contracts, waivers, and disclaimers student-athletes are required to execute as a condition of participation should be carefully examined by the NCAA and its member institutions as Keller and O'Bannon's cases progress. Perhaps it is time for student-athletes to exert greater control over these agreements and be more fully informed as to the effect of these form agreements.

While a few doomsday scenarios have been offered by legal scholars and others in the event the Supreme Court affirms the American Needle decision, such as envisioning a sports world where leagues can exercise total control--from fixed salaries on players and coaches, no free agency, no independent TV contracts--leading to labor unrest and escalating ticket prices (Harry, 2009), many other legal scholars suggest a win for the NFL could be limited solely to merchandising licenses and have little or no impact on the labor market or other business functions of the league. It is also debatable how great an impact a favorable decision for the NFL would have outside of the professional sport leagues, such as with the NCAA, due to the different organizational structures and economic conditions. Some insights may be found as various organizations such as labor unions, other leagues, consumer groups, and industry organizations submit amicus curiae briefs to the Supreme Court and offer additional arguments regarding the potential impact of a decision affirming or reversing the Seventh Circuit. It is also possible that regardless of the outcome of American Needle in the Supreme Court, the various interested parties will seek recourse in Congress to amend the antitrust laws. The leagues could seek an exemption for certain types of activities such as licensing, merchandising, and sponsorship activities, whereas consumer groups may seek to limit the scope of the single-entity defense. Certainly, all these cases will be watched closely by sport lawyers and sport marketers alike.

References

American Needle, Inc. v. New Orleans Louisiana Saints, 496 F. Supp. 2d 941 (N.D. Ill. 2007).

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

American Needle v. National Football League, 2000 U.S. LEXIS 4899 (U.S., June 29, 2009).

C.B.C. Distribution & Marketing, Inc. v. Major League Baseball Advanced Media, L.P., 505 F.3d 818 (8th Cir. 2007).

Edelman, M. (2008). Why the "single entity" defense can never apply to NFL Clubs: A primer on property-rights theory in professional sports. Fordham Intellectual Property, Media & Entertainment Law Journal, 18, 891-927.

Edelman, M. (2009, February 25 and 2008, January 2). Single entity ruling: 'Needle" in haystack. New York Law Journal, 239, np. Retrieved August 9, 2009, from http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1145394

Edmonds, E. (2009, August 6). Topps and Major League Baseball to announce exclusive deals staring 2010. Sports Law Blog. Retrieved on August 9, 2009, from http://sports-law.blogspot.com/

Fisher, E. (2009, July 27). No licensing deal, no problem for publishers of these video game titles. SportsBusiness Journal. Retrieved August 7, 2009, from http://www.sportsbusinessjournal.com/article/63125

Flint, J. (2009, June 3). License revenue, like everything else, takes the plunge. Los Angeles Times. Retrieved August 7, 2009, from http://latimesblogs.latimes.com/entertainmentnewsbuzz/2009/06/license -revoked-.html

Grady, J. (2007). Fantasy stats case tests limits of intellectual property protection in the digital age. Sport Marketing Quarterly, 16(4), 230-232.

Grow, N. (2008, Spring). A proper analysis of the National Football League under Section One of the Sherman Act. Texas Review of Entertainment and Sports Law, 9, 281-305.

Harry, C. (2009, August 9). Three cases: NCAA and NFL facing the gavel. Orlando Sentinel. Retrieved August 10, 2009, from http://www.orlandosentinel. com/sports/orl-sportsncaa-asf09080909aug09,0,7650539.story/

Johnson, G. (2008, December 22). Sports licensing in for tough year in 2009. Los Angeles Times. Retrieved August 7, 2009, from http://latimesblogs. latimes.com/sports_blog/2008/12/sports-licens-1.html

International Licensing Industry Merchandisers' Association. (2009). Types of licensing. International Licensing Industry Merchandisers' Association. Retrieved August 7, 2009, from http://www.licensing.org/education/licensing-types.php

Keller v. Electronic Arts, Inc. and the NCAA.

McCann, M. (2009, July 21). NCAA faces unspecified damages, changes in latest anti-trust case. Sports Illustrated. Retrieved August 10, 2009, from http://sportsillustrated.cnn.com/2009/writers/michael_mccann/07/21/nc aa/index.html#ixzz0NkvyG1Me/

McKeown, J. T. (2009, Spring). 2008 antitrust developments in professional sports: To the single entity and beyond. Marquette Sports Law Review, 19, 363-393.

O'Bannon v. NCAA and Collegiate Licensing Company.

Paolino, R. C. (2009, Spring). Upon further review: How NFL Network is violating the Sherman Act. Sports Lawyers Journal, 16, 1-46.

Rodenberg, R. M. (2009, June 19). Play calling Keller v. NCAA, Electronic Arts, and CLC. Sports Litigation Alerts. Retrieved August 10, 2009, from http://www.hackneypublications.com/sla/archive/000864.php

Sandomir, R. (2009, August 5). Topps get exclusive deal with baseball, landing blow to Upper Deck. The New York Times, p. B16.

DISCLAIMER: Professors Anita M. Moorman, JD, of the University of Louisville and Steve McKelvey, JD, of the University of Massachusetts, Amherst are the co-editors of this feature column. Professors Moorman and McKelvey teach sport law in the sport administration programs at their respective universities.

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 Professor Moorman or McKelvey to enter into an attorney-client relationship with the reader. This is not a solicitation for business. If you choose to contact either of us through e-mail, please do not provide us with any confidential information.

Inquiries regarding this feature may be directed to Anita M. Moorman at amm@louisville.edu and Steve McKelvey at mckelvey@sportmgt.umass.edu.

Anita M. Moorman, JD, is an associate professor in sport administration at the University of Louisville, where she teaches sport law and legal aspects of sport. Her research interests include commercial law issues in the sport industry, and legal and ethical issues related to sport marketing practices, brand protection, and intellectual property issues in sport.

Marion E Hambrick is a doctoral candidate in the sport administration program at the University of Louisville. His research interests focus on sponsorship and marketing issues in sport.