Is a professional sports league a single entity under Section 1 of the Sherman Act?
In 2001, the National Football League ("NFL") granted Reebok International Ltd. ("Reebok") an exclusive license to manufacture headwear featuring the logos and trademarks of every professional football team in the NFL. Because of this new arrangement, American Needle, Inc. (“ANI”) lost its 20-year license to manufacture such apparel. ANI argues that the NFL's contract with Reebok violates the Sherman Act, because the NFL and its member teams should not be considered a single economic entity. The NFL and Reebok contend that the member teams are united to produce a common product, namely professional football games, and thus are a single entity that is not subject to the regulations of the Sherman Act. In this case, the U.S. Supreme Court will decide whether or not the NFL is a single entity under Section 1 of the Sherman Act.
Questions as Framed for the Court by the Parties
1. Are the NFL and its member teams a single entity that is exempt from rule of reason claims under Section 1 of the Sherman Act simply because they cooperate in the joint production of NFL football games?
2. Is the agreement of the NFL teams among themselves and with Reebok International, in which the teams agreed not to compete with each other in the licensing and sale of consumer headwear and clothing decorated with the teams' respective logos and trademarks, and not to permit any licenses to be granted to Reebok's competitors for a period of ten years, subject to a rule of reason claim under Section 1 of the Sherman Act?
Respondent, National Football League (“NFL”), is an unincorporated association of 32 professional football teams that produces an annual season of football games and the Super Bowl championship game. In 1963, the NFL teams formed a separate entity called NFL Properties (“NFLP”) to license and market the intellectual property of the teams and also generally to promote the league. NFLP is responsible for granting licenses to manufacturers and vendors of various consumer products that feature the logos and trademarks of the NFL teams. For years, NFLP granted simultaneous licenses to several vendors who produced headwear, such as baseball caps and knit hats. Petitioner, American Needle, Inc., was one such vendor, holding a headwear license for 20 years before it expired in 2000.
In 2000, the NFL authorized NFLP to solicit bids from vendors for an exclusive headwear license. Co-respondent, Reebok International Ltd. ("Reebok”) won the bid and in 2001 received an exclusive license to produce headwear featuring NFL team logos for ten years. NFLP, thus, did not renew American Needle’s license or the licenses of any other headwear vendors.
American Needle quickly filed an antitrust lawsuit against the NFL, NFLP, the NFL teams, and Reebok, claiming that the exclusive headwear license violated Section 1 of the Sherman Act, 15 § U.S.C. 1,which outlaws any “contract, combination . . . or conspiracy, in restraint of trade.” One year after American Needle brought suit, respondents moved for a motion of summary judgment on the Section 1 claim, arguing it was immune from antitrust liability as a “single entity.” In response, American Needle sought a continuance and asked the U.S. District Court for the Northern District of Illinois to allow discovery, a motion opposed by respondents. Discovery ensued and upon completion, American Needle renewed its motion for discovery, claiming they did not receive the materials requested in the first motion. The district court then denied American Needle’s motion and granted respondents’ motion for summary judgment on the Section 1 claim, holding that "the NFL and the teams act as a single entity in licensing their intellectual property."
The Seventh Circuit Court of Appeals affirmed the judgment, ruling that the NFL and the teams could be considered a single economic entity and thus were immune from Section 1 claims. American Needle petitioned the U.S. Supreme Court for certiorari, which was granted on June 29, 2009.
Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, provides that “[e]very contract, combination . . . or conspiracy, in restraint of trade or commerce . . . is declared to be illegal.” As a threshold matter, Section 1 of the Sherman Act does not apply to purely unilateral conduct. In Copperweld v. Independence Tube, the Supreme Court held that no "contract, combination . . . or conspiracy" within the meaning of the Sherman Act is possible between a parent company and its wholly owned subsidiary because the entities are subject to unitary control and constitute a single entity. In this case, the Court will address whether the thirty-two teams in the National Football League ("NFL") may act as a single entity, exempt from Section 1 of the Sherman Act, in jointly licensing intellectual property that is individually owned by each team to a single supplier.
The Supreme Court has consistently applied Section 1 of the Sherman Act to entities involved in joint ventures, even when substantial cooperation between the entities was necessary for the joint venture to succeed. Generally, when applying Section 1 to the actions of a joint venture, the Court applies a rule of reason analysis, invalidating the agreement only if the anti-competitive economic effects outweigh the pro-competitive benefits of the agreement. The Court has held that a legitimate joint venture's internal decisions regarding the best way to sell its products are not per se violations of Section 1.
Does Section 1 Apply to the NFL’s Exclusive Licensing Agreement with Reebok?
Petitioner, American Needle, Inc. ("American Needle") argues that Section 1 should apply to the exclusive licensing agreement, because each individual NFL team is separately owned and operated, and the Court's jurisprudence has consistently found that Section 1 applies to all agreements between separately owned entities operating in interstate commerce. Despite the holding in Copperweld that a parent company and its wholly-owned subsidiary may not conspire for Section 1 purposes, American Needle argues that Copperweld also acted to affirm that Section 1 applies to all agreements between separately owned and operated entities. Although the NFL teams act as a joint venture and cooperate for variousaspects of the league, the teams also act as competitors in many ways, including in licensing and merchandising activities. American Needle argues that due to the fact that the NFL teams do not uniformly act with unitary interest, the logic of Copperweld cannot extend to apply to NFL teams. Finally, American Needle asserts that the Court has consistently held in the past that Section 1 applies to agreements between NFL teams and that the proper judicial response to the need for cooperation between teams within a sports league is the application of a rule of reason analysis, rather than complete immunity from Section 1 scrutiny.
In contrast, respondents, the National Football League ("NFL") and Reebok International, Ltd. ("Reebok"), contend that Section 1 should not apply to the licensing agreement because an internal agreement between the NFL teams to jointly license their intellectual property is not the type of agreement the Sherman Act is meant to proscribe. The NFL argues that the determination of whether the NFL teams act as a single entity should focus on economic realities rather than a formal determination of how the league is structured. Given the fact that individual NFL teams would be inherently unable to produce the product of NFL Football independently, the NFL argues that the clubs are interdependent and must work as a collective source of economic power to produce a product. Consequently, although the NFL teams compete on the field, in an economic sense, the teams combine to form a single firm. The NFL argues that Copperweld explicitly held that a firm should be free to structure itself in a way to achieve the largest efficiencies without increasing its antitrust exposure. From Reebok’s perspective, the ability to transact with the NFL teams as a single entity captures significant efficiencies and allows Reebok to produce goods that meet consumer demand. Finally, the NFL argues that in order to ensure the success of NFL Football, the teams must be able to jointly promote the product by collectively licensing its intellectual property. The NFL contends that Section 1 is not meant to reach a joint venture's internal decisions regarding the best way to promote its product.
How Do Prior Precedents and Legislative Acts Affect the Court's Analysis?
American Needle asserts that the Court's prior decisions dictate that the NFL may not constitute a single entity under the Copperweld doctrine because the NFL teams are separately owned and controlled and the Court has never extended the logic of single entity immunity beyond the context of a parent company and its wholly owned subsidiary. In previous cases, the Court has uniformly applied Section 1 to agreements between the NFL teams and teams in other comparable sports leagues, including the NCAA. Additionally, American Needle contends that Congress has endorsed and ratified the idea that the NFL teams and other sports leagues should not be immune from antitrust scrutiny. American Needle notes four separate occasions in which Congress failed to pass bills that created antitrust immunity for sports leagues, including the NFL. Additionally, American Needle argues that the Curt Flood Act, which provides that with respect to employment conditions for major league baseball players, the major league baseball teams are subject to the antitrust laws to the same extent as any other professional sports league, would be meaningless if agreements between the NFL teams were not subject to Section 1 scrutiny.
The NFL, however, argues that the Court's previous decisions have not determined the proper analysis to apply when the challenged decision was made within a league as opposed to between separate sports leagues, and especially when the decision concerns promotion of the league members' collective product. Additionally, the NFL contends that the NFL cannot be fairly compared with the NCAA because the NCAA is a collection of independent sports leagues and does not act interdependently to produce a product in any way. Additionally, the NFL contends that Congress's enactment of the Curt Flood Act was simply to establish that major league baseball is a “business affecting interstate commerce” and has no bearing on the issue of antitrust scrutiny in this case. The NFL also argues that American Needle may not rely on bills Congress failed to pass in order to provide insight into Congress's view of the Sherman Act, especially considering that the bills that failed to pass exempted sports leagues from Section 2 of the Sherman Act rather than Section 1, and that Congress has also rejected legislation that would affirmatively subject sports leagues to antitrust scrutiny. Finally, Reebok contends that the courts have firmly established that the antitrust laws are meant to protect competition, not individual competitors such as American Needle, and that competition between companies for exclusive contracts is a well-established form of legitimate competition.
In this case, the U.S. Supreme Court will determine whether the National Football League ("NFL") is a single entity and thus immune from scrutiny under Section 1 of the Sherman Act, 15 U.S.C. § 1. The Court’s ruling will affect other professional sports leagues as well as “joint ventures” in other industries, such as banking and utilities.
Petitioner, American Needle, Inc., contends that the NFL is not a single entity and, therefore, is subject to the Sherman Act’s restrictions. American Needle argues that each of the teams in the NFL is an independent firm that competes with the other teams. According to American Needle, NFL teams "are separately owned and controlled profit-making enterprises," each of which independently owns the intellectual property that is licensed to the vendors. Though American Needle recognizes that the teams must come to some agreements to be able to schedule football games, it contends that the teams compete with one another both on and off the field. Specifically, American Needle argues that a collective agreement between these teams to grant an exclusive license is an illegal restriction on competition under the Sherman Act.
Respondents, National Football League, et al. (collectively "the NFL"), argue that their organization is a single entity that produces a single product, professional football games. Respondents argue that the value of each team and the intellectual property rights in question have value only because they are associated with the league. Though the teams compete on the field, the NFL contends that the economic interests of each team are directly linked to the success of the league as a whole. The NFL argues that the league's true economic competition is with other professional sports and types of entertainment.
If the U.S. Supreme Court holds that the NFL is a single entity, American Needle argues that consumers will be adversely affected. In support of this assertion, American Needle notes that the price of a baseball cap featuring an NFL team logo increased 50 percent after the NFL granted the exclusive headwear license to Reebok. Furthermore, American Needle alleges that the single entity approach allows professional sports teams to put restrictions on the broadcasting of games, thus increasing the cost to the viewer. Amici such as the NFL Coaches Association and the NFL Players Association argue that treating the NFL as a single entity could adversely affect the value and availability of the contracts for coaches and athletes, because NFL teams could collectively agree not to hire or restrict the wages of coaches or players. Several economists writing in support of American Needle contend that sports leagues in other countries are not structured around a central organization, such as the NFL, that these alternative models are quite successful, and, thus, that the NFL does not need to be considered a single entity to be economically viable. These economists also argue that treating the teams of the NFL as independent entities could actually result in greater economic efficiency citing an increase in the number of televised college football games when the NCAA gave up control over the broadcast rights for every game.
In response, the NFL contends that treating the league as a single entity leads to better economic benefits for all parties. The NFL and other professional sports leagues, such as Major League Soccer (MLS) and the National Association for Stock Car Auto Racing, Inc. (NASCAR), argue that if these organizations are not considered single entities, they would be subject to numerous costly antitrust lawsuits. Amicus, VF Imagewear, another company that manufactures products featuring sports team logos, argues that the exclusive license contract model is more efficient for vendors than conducting individual negotiations with each of the 32 NFL teams. This centralized process, VF Imagewear contends, leads to greater selection and lower prices for consumers. Finally, several economists in support of the NFL argue that joint ventures are sometimes economically efficient and should not be discouraged by the Sherman Act.
In this case, the Court will determine whether the single entity exemption to Section 1 of the Sherman Antitrust Act may apply to a joint venture that acts with unitary interest in parts of its business, or whether the exemption only applies to a parent company and its wholly owned subsidiary. American Needle contends that the Court has consistently held that joint ventures are subject to Section 1 liability and that since the NFL does not act with unitary interest in all of its functions, it is capable of conspiring for antitrust purposes. The NFL counters that it must act interdependently in order to produce a competitive product and consequently, should be exempt from antitrust liability for those limited actions that require interdependence and promote competition.