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American Needle, Inc. v. National Football League: Apocalypse Soon?

I don't mean to alarm anyone, but there's a chance -- depending on the whims of a couple septuagenarians -- that much of the NFL world as we know it could come to an end.  I'm not talking about the potentially uncapped 2010 season, either.  Instead, I'm talking about a United States Supreme Court case called American Needle, Inc. v. National Football League, et al., Docket No. 08-661.

Procedural History

In 2000, the NFL authorized NFL Properties ("NFLP") to solicit bids from companies who wished to obtain an exclusive headwear license.  Reebok won the bid and received a ten (10) year exclusive license to make hats and other headwear featuring NFL team logos.  Because of this exclusive license, NFLP accordingly refused to renew American Needle's (and all other headwear vendors') licenses.

American Needle filed a lawsuit against the NFL, NFLP, each of the thirty-two (32) NFL teams separately, and Reebok, claiming that such an exclusive license violated Section 1 of the Sherman Antitrust Act.  Section 1 prohibits any "contract, combination . . . or conspiracy, in restraint of trade."  The NFL and other respondents moved for summary judgment  -- asked the court to rule in the respondents' favor because there was no material issue of fact to be resolved and the law as applied to the undisputed facts clearly entitled the respondents to a favorable judgment -- by arguing that the NFL was immune from antitrust liability because it was a "single entity." 

[Briefly, the single entity argument states that the NFL and its teams are really just one business for purposes of the Sherman Antitrust Act.  This is important as Section 1 explicitly requires an agreement between entities and a single entity could not reach an agreement with itself.]

After a couple questions regarding discovery of evidence were answered, the U.S. District Court for the Northern District of Illinois granted respondents' motion for summary judgment, ruling that "the NFL and the teams act as a single entity in licensing their intellectual property" and were, therefore, immune to an antitrust lawsuit under Section 1.

The Court of Appeal for the Seventh Circuit affirmed the lower court's judgment and explicitly accepted the single entity rationale.  American Needle petitioned the U.S. Supreme Court, asking them to grant certiorari and hear the case. 

In yet another odd twist to the case, the NFL and the other respondents took the highly unusual step of filing a brief with the Supreme Court urging them to hear the case.  The respondents' position is that the Court should rule, once and for all, whether the NFL is a single entity for purposes of Section 1.  The Court agreed to hear the case, and oral arguments in American Needle are set for Wednesday, January 13, 2010.

The Single Entity Argument

It is probably an understatement to say that courts have had a hard time uniformly applying antitrust laws to professional sports leagues.  In 1922, Major League Baseball was granted a blanket exemption to antitrust laws (which was scaled back slightly by the Curt Flood Act of 1998, at least vis-a-vis employment rights of baseball players).  Both the NFL and NBA subsequently sought the same exemption, only to see the Court rule that the exemption (a) probably wouldn't have been granted to baseball if they could do it all over again and (b) regardless, the exemption applied only to MLB.  (For a relevant NFL case, see Radovich v. NFL, 352 U.S. 445 (1957).)

However, because they have recognized that NFL teams (and other pro sports teams) have a unique relationship with one another -- one team cannot stage its own games, for example -- courts have refused to find every agreement between teams per se illegal, even where the agreements would likely be illegal under antitrust laws if they were made in a different industry.  Instead, courts have focused on whether an agreement is, in fact, an unreasonable restraint on competition.

Never content with seeking ad hoc exceptions to antitrust laws, the NFL has long sought a blanket exemption such as the one enjoyed by MLB and has the pushed single entity theory several times in federal court over the years, though it has almost always been rejected.  (Prior to American Needle, the only other time a federal court seemed to embrace the theory was in Chicago Professional Sports Limited Partnership v. NBA ("Bulls II"), when the Seventh Circuit, without explicitly ruling the NBA a single entity, laid out the framework for why such an argument would make sense in certain contexts.)  Most notably, in Los Angeles Memorial Coliseum Commission v. NFL, 726 F.2d 1381 (9th Cir. 1984), the Ninth Circuit flatly refused to entertain the NFL's single entity theory, explaining that, "to tolerate such a loophole would permit league members to escape antitrust responsibility for any restraint entered into by them that would benefit their league or enhance their ability to compete even though the benefit would be outweighed by its anticompetitive effects."

Perhaps emboldened by the Seventh Circuit's ruling in Bulls II, in American Needle, the NFL latched on to the unique relationship between teams, arguing that no team "can produce even a single unit of production—one football game—on its own; only through their collective actions can the member clubs produce the full season of games, including the playoff and Super Bowl games, that make NFL Football a unique and valuable product."  Thus, the argument goes, no single team has a tangible economic value outside the confines of its place in the league as a whole and the league must therefore be seen as a single entity.  In affirming the district court's ruling, the Seventh Circuit picked up where it left off in Bulls II, stating that the unique nature of professional sports leagues requires that the single entity question be compartmentalized and determined on case-by-case basis, "one facet of the league at a time."  This test, essentially, means that, depending on what they are trying to do, the NFL (and other leagues) could be either a single entity or multiple entities, and that each question will have to be determined as it arises.

The Seventh Circuit agreed with the district court that the NFL was a single entity when it came to granting a license to produce headwear featuring NFL logos.  American Needle, Inc., appealed to the Supreme Court to get this decision overturned.  The NFL, conversely, asked the Supreme Court to hear the case, not to affirm that narrow result, but to expand the holding and find the NFL a single entity for all business purposes.

Why This Matters

So, why should you care and why have I spent over 1,100 words getting to this point?  Because, in a sense, this is a no-risk move for the NFL.  If the decision is overturned, all it means is that they have to let more than just Reebok produce hats and they probably don't lose any money in the end; if they win at the Supreme Court and get the broad ruling they seek, they'll be more-or-less free to do whatever they want in terms of salaries, contracts, etc.  Meaning, should the NFL get single entity status, the league could set league-wide salary scales tied directly to years in the league, meaning that Peyton Manning, Charles Woodson, Brian Griese, and Alan Faneca (for example) would all make the same salary.  (This would almost certainly have to be grandfathered in, so my example is somewhat flawed, but you get the point.)  The league could change the rules for free agency so that teams can more easily keep players as long as they like.  The league could set flat salaries for all rookies, regardless of draft position.

In short, the NFL could do anything it wanted on its own, provided that action did not run afoul of other laws, with zero repercussion.

It bears mentioning, of course, that an NFL win does not necessarily mean they would do these things.  Some of the doomsday scenarios -- prohibition of player movement, for example -- are unlikely even if they were possible because the NFL is smart enough to realize that consumers (i.e., fans) enjoy the speculation and interest that free agency and the draft create.  You have to assume, even if the NFL gets the broadest possible ruling from the Court, that it is a rational actor and is going to remember that maximizing fan interest leads to greater profits in the long run. 

(Besides, you have the simple fact that, if the NFL really wanted to, it could restructure itself through a sale of everything to one owner so that it was definitely a single entity.  This is how Major League Soccer was structured from the beginning and no one has ever seriously contended that it was anything but a single entity.  That the NFL has not gone this route yet suggests that they are more interested in skirting antitrust laws in a few small areas and are otherwise okay with the current system.)

Even with those caveats, however, it is still fair to say that a broad decision in favor of the NFL in American Needle would alter the NFL product to some unknown extent.  Maybe it deflates high-end salaries, such as the contracts received by QBs and LTs.  Maybe it increases the cost of all NFL-authorized merchandise because the league would be able to grant exclusive licenses for every single item you want to buy, eliminating competition.  Neither of those would seem huge, but they would certainly alter things long-term.  Such a decision would also fly in the face of about 60 years of jurisprudence regarding antitrust and the NFL, which could conceivably encourage owners to feel they have a mandate to do whatever they want (thus blowing the rational actor theory).  If we've learned one thing as sports fans over the years, it's that one should never underestimate the self-interest of a bunch of rich, white American males.

Which Outcome Is Likely?

The NFL is apparently banking on the generally pro-business position of the current Supreme Court.  Chief Justice Roberts and Justices Scalia, Alito, and Thomas are almost certain to side with the NFL.  Justice Sotomayor, who ruled against a single entity theory proffered by Major League Baseball while she was a lower court judge, as well and Justices Stevens and Ginsburg are likely to side with American Needle (and, not coincidentally, with the players).  This means that Justices Breyer and Kennedy, the aforementioned septuagenarians, will decide the case. 

Popular opinion seems to be that Breyer will side with the NFL based on his opinion in 1996's Brown v. Pro Football, Inc.  However, Breyer's decisions on antitrust law dating back to his time on the lower federal bench have shown him to favor exemptions and bright-line rules only when the benefits of exhaustive analysis using all of the economic and other tools available in modern antitrust cases do not justify the costs.  Given the far-reaching impact a broad decision could have in this case, Breyer could easily determine that further analysis, perhaps in an area more pressing than headwear, is necessary and justifies the cost of future litigation on the issue.

Justice Kennedy has explicitly taken a case-by-case approach to questions of antitrust law, deciding most based upon which outcome is more likely to spark competition.  In that vein, it is probable (though not certain) that he would side with American Needle.

The wild card in all of this is that, in my opinion, the Seventh Circuit's rationale in American Needle does not hold up.  That decision rested in large part on the circuit court's interpretation of a U.S. Supreme Court case, Copperweld Corp v. Independence Tube Corp., that held a parent corporation and a wholly owned subsidiary were a single entity based on their "unity of interests."  The Seventh Circuit read "unity of interests" broadly and determined that, because teams must cooperate to play a game, the NFL is a single entity.

The problem with this rationale, however, is that it glosses over the real issue -- whether an agreement unreasonably decreases competition -- and focuses on a common purpose -- presenting NFL football games.  Except Copperweld rejected in no uncertain terms the idea that a common purpose was enough to make multiple companies a single entity.  Additionally, the Seventh Circuit points to the need for cooperation between teams in areas like revenue sharing, scheduling, and rules, however other federal courts and the U.S. Supreme Court have, for over 50 years, noted this cooperative nature while still ruling that the NFL was not a single entity.

Whether the Supreme Court will embrace this novel reading of Copperweld and the Seventh Circuit's reasoning for calling the NFL a single entity is anybody's guess.  However, given the flaws in legal reasoning underpinning the American Needle decision, I would be shocked if they go as far as the NFL wishes.  My guess is that it's a 5-4 decision either way, with the Court either affirming the lower court decision on narrow grounds (i.e., a de facto antitrust exemption for marketing their intellectual property) or overruling the decision as the agreement was a Section 1 violation, announced on the last day of the term in June.