Pro sports and antitrust: Argument Preview
on Jan 12, 2010 at 7:32 pm
The Supreme Court will hold 70 minutes of oral argument at 10 a.m. Wednesday in American Needle v. National Football League, et al. (08-661). Arguing for American Needle, Inc., will be Glen D. Nager of Jones Day in Washington, and for the NFL will be Gregg H. Levy of Covington and Burling in Washington, each having 30 minutes to argue. The U.S. government, amicus in support of American Needle, has 10 minutes of argument time, with Deputy Solicitor General Malcolm L. Stewart appearing.
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The more professional sports in America acts like hard-nosed Big Business, and the less it seems like an idyllic revival of Olympian competition, the more it risks trouble with the federal antitrust laws. And that evolution has put the Supreme Court, too, in the bleachers. The Court, indeed, has been fascinated with the subject for nearly a century. And, except for its early starry-eyed vision of baseball, it has been a fairly tough cop on the sports antitrust beat. It returns to that patrol in a new case, involving the marketing to the fans of hats, sweatshirts, and other team-identifying gear.
Background
Since 1922, and the decision in Federal Base Ball Club v. National League, giving major league baseball an antitrust exemption, the Court has been monitoring the business side of the pro sports industry.  It has given no other sport such immunity to the Sherman Act (and Congress has not done so, either), but the Court has never settled a fundamental legal question. That question is whether the pro sports leagues are immune to antitrust scrutiny when they take action together, potentially or actually adding to their enormous potential as money-making machines. The question takes on added significance given today’s commercial profile of pro sports, with astronomically wealthy businessmen owning most of the teams, with many of the players, too, being fantastically rich, with most if not all of the sports stadiums and arenas being re-named for a profit-oriented company, and with a fan having to dig down deeply to buy a ticket to get in. A victory for pro sports in the new case of American Needle v. NFL may well add to the industry’s economic prowess.
While the case focuses on pro football, the outcome is expected to have a significant impact on other pro sports leagues as well – basketball, hockey, soccer, stock-car racing, tennis. Even major league baseball, despite its antitrust immunity, has been sued over joint promotion of fan goods. And while the case focuses on the joint marketing of fan gear, the outcome may well reach beyond the vending enterprise to at least some facets of the competition on the field or court. That is because combined activity by league owners is not confined to marketing fan gear. (Beyond sports, the principles at stake in this dispute may well affect the legal future of other joint ventures that take integrated action, because the Court may decide more broadly than the sports context.)
The American Needle case turns on a basic concept of antitrust law, specifically, Section 1 of the 1890 Sherman Antitrust Act. Under that section, it is illegal for any group or combination of independent enterprises to join together to “restrain trade or commerce.” Under a 1984 Supreme Court ruling (Copperweld v. Independence Tube),  Section 1 does not apply to a parent corporation and a wholly-owned subsidiary acting jointly because they are part of a single whole, a “single entity,” and thus cannot be thought to get together for concerted action.  The American Needle lawsuit does not challenge that basic premise. What it does test is whether a pro sports league, made up of independently owned teams, can qualify as a “single entity” under Section 1 when the league and its members act jointly — at least when the joint enterprise is refusing to compete in selling trademarked goods.
The NFL is an association of the 32 separately-owned teams. Every year, the league and the teams work it out jointly to stage more than 250 games each season. It takes a great deal of coordination and integration of activity to make a season work. No single team can stage a game on its own, the way a schoolyard pickup team can choose up sides and play. Putting on the championship game at the end of the season — the Super Bowl — is itself a highly complex affair.
In the early 1960s, seeking to stir greater fan excitement over pro football, the teams and the NFL decided that they would act together to promote their “brand” — the NFL “brand” as well as the identifying logos and trademarks of the individual teams. They set up NFL Properties as a separate marketing entity; one of its primary activities has been to control how the legally-protected intellectual property — the trademarks – can be used on merchandise. Vendors obtained licenses to produce and sell the identifying caps, jerseys, pennants, and so on.
Initially, NFL Properties gave licenses to a number of separate vendors to produce bill caps and stocking caps.. One of those vendors was American Needle, Inc., a company located in Buffalo Grove, Ill. For 20 years, it had a license to produce NFL team caps. In 2000, the league and its members concluded that team products were not doing very well commercially, and they decided the answer was to give a license to a single vendor. They agreed not to compete with each other in this marketing enterprise. Ultimately, in May 2001, Reebok International Ltd., a well-known producer of sports goods, won an exclusive license, lasting ten years, to sell team headwear. One of the documents in the Supreme Court case quotes a Reebok executive as saying later that caps that had sold for $19.99 a few years earlier were selling for $30.
American Needle sued the NFL, NFL Properties, the teams, and Reebok, claiming a violation of the Sherman Act. The exclusive deal for Reebok, the lawsuit contended, was a result of a combination designed to restrain commerce in caps.   The NFL, the teams, and the affiliates contended that they were all part of a single enterprise; just as they had to work together to put on games, they had to act jointly to market pro football’s and the teams’ brands. A federal judge agreed, limiting the ruling to the exploitation of the trademarks. The Seventh Circuit Court upheld the “single entity” finding, but stressed that it was only dealing with the gear marketing. “The NFL teams can function onlyh as one source of economic power when collectively producing NFL football,” the Circuit Court said. And that single power, it concluded, controls the promotion of the sport.
American Needle then took the case on to the Supreme Court, filing for review on Nov. 17, 2008.
Petition for Certiorari
In its initial plea to the Supreme Court, sparing in length, American Needle raised two questions: were the NFL and member teams a single entity under Sherman’s Section 1, when the teams have competing economic interests and control their own economic decisions, and have the ability to compete, and whether the exclusive licensing deal with Reebok, including its pact among the teams not to compete over the marketing, violated Section 1.
In just six pages of argument, the petition contended that the Seventh Circuit ruling conflicted with the Supreme Court’s 1957 decision in Radovitch v. NFL, holding that pro sports leagues were subject to Section 1. It also claimed a conflict on the single-entity immunity issue between the Seventh and seven other federal Circuit Courts. “The Seventh Circuit’s decision…stands alone,” it asserted.
In response last January, the NFL, while not giving up on its “single-entity” claim, urged the Court to hear and decide the case. Conceding the disagreement among the lower courts on “whether a professional sports league of separately owned teams can constitute a single entity for purposes of Section 1”, the league arfgued that this division represented a deeper conflict over how to apply the Copperweld decisino to “joint ventures that involve a high degree of economic integration.” The resulting uncertainty, it said, “chills collaboration and decision-making” for the NFL and other nationwide joint ventures, the league said. Further review in lower courts would only aggravate the conflict, the brief suggested. It noted that there had been “a cascade of antitrust suits” against pro sports leagues, including even major league baseball over trademark licensing.
The National Basketball Association and its marketing affiliate, and the National Hockey League, while supporting the NFL, joined in urging the Court to grant review.
The Court did not agree promptly to hear the case. Instead, it first sought the federal government’s views. The U.S. Solicitor General argued against review. While expressing concern about the Seventh Circuit’s ruling, the government said the case was limited to the specific facts, and it insisted that there was no conflict among the appeals courts. “The sports-league context is not a suitable one,” it contended, “in which to address broader questions concerning the application of single-entity principles to joint ventures generally.”
The Court declined to take that advice, and granted review at the end of last Term, putting the case over to October Term 2009.
Merits Briefs
American Needle’s brief on the merits focused mainly on the Copperweld decision, contending that it reaffirmed a “long-standing antitrust principle” that applies, without exception, to “all agreements between separately owned and controlled entities” even when “substantial cooperation was inherent in the nature” of the business. That principle, it said, has been reinforced by the Court over more than a century. The teams in the NFL, the brief asserted, directly fit the definition of an combination that directly comes under Sherman Section 1. The special deal with Reebok, it went on, “is the very definition of concerted conduct by multiple entities, as it required the specific approval” of every one of the 32 teams.
The brief also relied on the Radovitch precedent, and noted that, two weeks after the Copperweld decision came down in 1984, the Supreme Court had applied Section 1 to the teams in college football (National Collegiate Athletic Association v. Board of Regents). The NCAA ruling, American Needle said, is “substantively indistinguishable” from the present case.  The balance of its brief is an attempt to refute the Seventh Circuit point by point.
The Justice Department, taking American Needle’s side in the case, argued in its amicus merits brief that the NFL “is a legitimate joint venture,” of what it called a “hybrid” nature: teams that compete vigorously in some respects, but of necessity cooperate in others. The Court, it said, had not previously decided whether such a “hybrid” was covered by Section 1. It went on, however, to assert that the rationale of Copperweld could be extended to the NFL, with a “more nuanced analysis.”
It offered the Court a two-part test to determine whether the NFL and its teams were to be treated as a “single-entity.” They could be, it suggested, if they have “effectively merged” the challenged part of their operations, eliminating competition among the teams, and if their joint actions have not “significantly affected” the actual or potential competition among the teams beyond the merged activity. “Only a limited range of conduct would qualify for single-entity treatment,” it summed up.  It disputed American Needle’s argument that NFL teams’ conduct was always subject to Section 1 because of their separate ownership and control.y u
However, the government brief also contended that the NFL’s “request for a broad judicially created exemption from Section 1” should be rejected. That “oversimplifies the competitive landscape the teams inhabit,” and goes far beyond what the Supreme Court had said previously about “single-entity” treatment. If the NFL wants that sweeping exemption, it added, it should ask Congress for it. The brief concluded by urging the Court to overturn the Seventh Circuit, and order it to reconsider.
The NFL’s merits brief returned to the league’s basic theme that it and the 32 teams are the functional equivalent of “a single firm,” with economic power only to act as a unit. It did offer a seeming concession, saying that “single-entity” treatment should be available for a sports league “in at least some aspects of its operations.” It then went on to defend such treatment for the promotional activities at stake in this case. “Such intellectual property is an integrated part of the production of NFL Football as well as its promotion.” It has been the approach sports leagues have used for generations, it said, and the approach has, indeed, included the use of blanket licenses for caps.
Without disputing the Radovitch and NCAA precedents, the NFL brief argued that they involved agreements between leagues, not efforts within a league to “produce a joint product.” The brief rejected the federal government’s two-step formula for judging single-entity treatment for sports leagues, saying that test “is neither helpful nor necessary.”  The focus should be on whether joint venture members have independent economic power, not on whether they have merged their operations, it asserted.
Reebok International filed its own merits brief, a spare document making the main point that, if the Seventh Circuit were uphold only so far as it found “single-entity” status for licensing NFL trademarks, that would end any claims that American Needle had against Reebok.
The potentially wider reach of the American Needle case, to other pro sports leagues, to league activities beyond trademark licensing, and to other industries is the theme of most of the amici briefs in the case. The players’ unions in pro football, baseball, basketball and hockey argued, for example, that the NFL is using this case as “a Trojan horse designed to free sports team owners from Section 1 scrutiny so they can restrain competition with impunity in the market for player services.” They predicted the loss of gains made by players over the years, and forecast “labor disputes and work stoppages” if the pro leagues and their team owners gain “broad single-entity” protection. The National Football League Coaches Association also argued ust” that an NFL victory would effectively end competition in the “currently robust” labor market for professional coaches.
Some business groups, some economists who have studied sports antitrust issues, and the American Antitrust Institute, joined by the Consumer Federation of America, also supported American Needle’s side of the case. The latter two groups argue that Section 1 immunity is not necessary “beyond the production of football games” — an area of pro league joint activity that no one in the case challenges under Section 1.
Much of the amici support for the NFL and its teams comes, predictably, from other pro leagues — for basketball, tennis, soccer, stockcard racing, hockey — and from the NCAA. Those groups, in solidarity with the NFL, express their aspiration for “single-entity” status for all production, promotion and marketing decisioins of their leagues — as the National Hockey League put it, “any internal business decision concerning how and where to make, promote or sell the venture’s output.” The NCAA brief urged the Court to free “all sports leagues, including the NCAA,” from having to grow timid “over baseless antitrust litigation.” It added that the analysis should focus on the character of a challenged joint restraint, not on a league’s “governance structure.”
On the broader business implications of the case, two of the nation’s best-known commercial operations that started out as joint ventures — MasterCard and Visa — called for a balancing test of the need for antitrust enforcement with the need to provide joint ventures “space to promote vigorous interbrand competition.” The NFL has on its side its own group of economists who study sports antitrust policy. Also on its side is Electronic Arts Inc, the software company that markets sports video games under the brand label “EA Sports,” including “Madden NFL Football,” described as “one of the highest-revenue producing video game titles of all time.” It has licenses from the NFL, and from the pro football players’ union. Another fan clothing gear producer with licenses from pro sports leagues, VF Imageware, Inc., lined up with the NFL.
Analysis
The Court faces a clear-cut choice among ways to approach the decision in the American Needle case: it can engage in a fact-intensive inquiry, paying closest attention to the details of how the NFL and its teams handling their fan wear vending business, or it can broaden its vision to the role that joint ventures, an increasing business model, play in the Nation’s economy. The case has attracted most of its attention because it involves the highly visible phenomenon of professional sports. But, unless the Court produces a really narrow ruling on the case, anything it concludes may well produce significant legal guidance for joint ventures across a variety of markets.
The NFL, strategically, would prefer to keep the case narrowly focused, on the apparent belief that a close examination of just the trademark licensing arrangement would seem less threatening to economic competition as a general matter. The Justice Department, which did not support Supreme Court review at all, is interested in a narrow outcome that would reach so-called “hybrid” joint ventures, perhaps not reaching much beyond pro sports. American Needle, of course, wants a broad ruling but only in the pro sports context, seeking to have every facet of the leagues’ business decision-making covered by Section 1.
Because the case has attracted comparatively little amici interest beyond the pro sports community, the strongest temptation for the Court that sometimes prides itself on “minimalism” would be to keep the focus there, and leave it to later litigation in other sectors of the economy to test the wider reach of a ruling.
It is impossible to know whether sentimental notions will play any part in the Court’s consideration. Americans have a strong romantic involvement with sports, both college and pro, and some of the Justices may well share some of that. If they do, however, it is not clear which way that might incline them: do they see the leagues and their teams as vulnerable to damaging economic injury if their joint promotional efforts are impaired, or do they see those entities as threats to the economic futures of players and coaches (and thus, perhaps, to the integrity of the games)? Justice Sonia Sotomayor, during the consideration of her nomination, got highly favorable publicity as the supposed “savior of baseball” for her lower court decision putting an end to a player strike in 1995 when she ruled against the owners. Perhaps, if her colleagues remember that, and are impressed by it, it could have some influence on the sentimental side of this case.
