Ending a string of nearly twenty years of victories in front of the Supreme Court by defendants in Sherman Act cases, the Supreme Court last month in American Needle, Inc. v. National Football League, et al., No. 08-661, ruled against the NFL in a case brought under Section 1 of the Sherman Act. In a unanimous decision, the Supreme Court soundly rejected the ”single entity” defense advanced by the NFL, the 32 NFL teams and the entity they created to manage and market their intellectual property, National Football League Properties (”NFLP”) (collectively, the “NFL defendants”), to the Section 1 claim asserted against them, remanding the case to the district court for further proceedings to determine if they had conspired together in restraint of trade.
American Needle involved a narrow issue before the Supreme Court: whether the NFL defendants were capable of conspiring together or whether they acted as a single entity for purposes of Section 1 of the Sherman Act in connection with their conduct in licensing their intellectual property. As demonstrated in the record, the NFL defendants had acted jointly in the licensing of their intellectual property since 1963 when NFLP was created. From 1963 to 2000, the NFL defendants licensed their intellectual property through NFLP, granting licenses on a non-exclusive basis to vendors to manufacture and distribute apparel with team logos and trademarks. American Needle was one of those non-exclusive licensees. In December 2000, the 32 teams of the NFL changed their game plan, and agreed to permit NFLP to enter into an exclusive license for the manufacture of the team apparel, which NFLP subsequently granted to Rebok. American Needle thereafter brought suit against the NFL, the NFL teams and NFLP in the Northern District of Illinois, alleging that the agreements between the NFL, the 32 teams, NFLP and Reebok violated Sections 1 and 2 of the Sherman Act. In their answer to this complaint, the NFL defendants asserted that they could not conspire under Section 1 ”because they are a single economic enterprise, at least with respect to the conduct challenged.”
After permitting limited discovery, the District Court dismissed the Section 1 claim, agreeing with the NFL defendants’ “single entity” defense. The District Court found that the NFL defendants ”in the facet of their operations respecting exploitation of intellectual property rights,” were “so integrated” that “they should be deemed a single entity rather than joint ventures cooperating for a common purpose.” American Needle appealed that decision to the Seventh Circuit Court of Appeals.
The Seventh Circuit looked at the issue of the “single entity” from the perspective of the “economic power” at issue in the relationship. The Seventh Circuit concluded that since “football itself can only be carried out jointly,” then “only one source of economic power controls the promotion of NFL football.” In the area of licensing team’s intellectual property, the marketplace was not deprived of independent sources of economic control, which competition assumes, as a result of the challenged activity. The Seventh Circuit affirmed the District Court. American Needle and the NFL defendants sought review by the Supreme Court.
Justice Stevens, writing for a unanimous court, rejected the “single entity” argument, in overturning the Seventh Circuit’s decision. Noting the long-established precedent of considering “form over substance” when reviewing conduct as a possible violation of Section 1’s prohibition against engaging in a “contract, combination . . ., or conspiracy” in restraint of trade, the Court observed that the issue is whether the parties are “separate economic actors” following their own “separate economic interests.” If that is found to be the case, then the market is deprived of independent centers of decisionmaking by such combination and actual or potential competition is lost. Considering the facts in the American Needle case from this perspective, the Court found each team possessed the attributes of independent economic decisionmaking, advancing their own economic interests which could be at odds with other teams. For example, from the perspective of a vendor making a team hat, the Colts and the Saints are two potentially competing suppliers of valuable trademarks. When the Colts license their intellectual property, according to the Court, they promote their own economic interest, not the interest of the teams as a whole. Accordingly, each team is an independent center of decisionmaking and when those teams jointly license the right to their intellectual property to a single vendor, they deprive the market of other centers of decisionmaking and, accordingly, of actual or potential competition. It is this context that distinguishes the relationship between the parties in American Needle from the relationship of a parent and its wholly owned subsidiary, which has long been found not to be capable of conspiring under Section 1. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). In the latter situation, the economic interests of the parent and subsidiary are one. The same cannot be said for the 32 NFL teams, each of which is an independently owned and managed business.
In reaching this conclusion, the Court rejected the analysis of the Seventh Circuit which found a single entity because “without [the cooperation of the teams], there would be no NFL football.” Finding the justification of cooperation to be irrelevant to whether the cooperation is concerted or independent, the Court noted that cooperation can be found in many different contexts which bear scrutiny under Section 1. As the Court observed:
“Any joint venture involves multiple sources of economic power cooperating to produce a product. And for many such ventures, the participation of others is necessary. But that does not mean that necessity of cooperation transforms concerted action into independent action; a nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to § 1 analysis.”
As with the NFL and the NFL teams, the Court also found the decisions of the NFLP itself to constitute “concerted activity” under Section 1. Although noting that this was a “closer call,” due to the fact that NFLP was a separate entity and the profits were distributed to the teams on an equal basis, the Court nevertheless found that for the same reasons the NFL teams’ conduct was subject to review under Section 1, so was NFLP’s conduct. For the Court here, the decision came down to a truism:
“Apart from their agreement to cooperate in exploiting those assets [the intellectual property], including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear, to the sale of such items, and to the granting of licenses to use its trademarks.”
NFLP simply was “an instrumentality” of the teams and the fact that the NFL teams shared in profits and losses of the NFLP did not save the case from Section 1 scrutiny, since if that were the case, then “any cartel ‘could evade the antitrust law simply by creating a “joint venture” to serve as the exclusive seller of their competing products.’” American Needle, quoting Major League Baseball Properties, Inc. v. Salvino, Inc., 542 F.3d 290, 335 (2nd Cir. 2008).
The Supreme Court’s opinion in American Needle does not mark the end of the NFL defendants’ contract with Rebok. The Court did not find the conduct to be a per se violation of the Sherman Act but rather conduct subject to further review under a “rule of reason” approach. Accordingly, the American Needle case has been sent into overtime and it is up to the NFL defendants to justify their conduct and save their agreement.
As American Needle continues its path in the District Court, attention will be turned to the ramifications of the decision. This decision is not limited to the grid iron but will apply to other venues where companies jointly market their intellectual property through a single licensing entity. Whether it is the NBA, NASCAR, other sports or other venues, closer scrutiny should be expected of those marketing relationships.