Football and Antitrust Law: American Needle v. NFL and Its Meaning for Combinations in Restraint of Trade and the Rule of Reason in the 21st Century

Football and Antitrust Law:

American Needle v. NFL and Its Meaning for Combinations in Restraint of Trade and the Rule of Reason in the 21st Century

By Michael Sabino | Published on The National Law Review | Copyright 2011

Source: http://www.natlawreview.com/article/football-and-antitrust-law-american-needle-v-nfl-and-it-s- meaning-combinations-restraint-tra

Introduction

NFL football. And antitrust law. What, if anything, do they have in common? A great many things, one might say. Both conjure up images of powerful contestants vying for control on the field of play. Each participant utilizing its skills, its knowledge, and its intuition to gain an edge and dominate the game. Competition in its purest form. Unless somebody cheats, of course.

But rules — that is why we must have rules. Otherwise competition descends into chaos, battle descends into barbarism, and injuries inevitably follow. Football, for all its controlled violence, has rules that must be followed. In the realm of business, and the controlled violence we call “competition,” antitrust law provides these rules, in large part to keep the game fair and provide the proverbial level playing field. Thus, even from this small comparison, we can see that professional football and antitrust law have something in common, after all.[1]

Now add to the aforementioned confluences the recent Supreme Court decision in American Needle, Inc. v. National Football League, et al.,[2] where the underdog, a maker of sporting apparel, decided to challenge on antitrust grounds the loss of its right to manufacture

league-sanctioned hats and headwear.

The first half of this Article will introduce, in pertinent part, the essentials of antitrust law relevant to understanding the Supreme Court’s decision, including a brief overview of the preceding landmarks that formed the basis of the Justices’ ultimate ruling.

The second half of the Article shall be devoted to the actual “play by play” of the Court’s decision, and how it was arrived at. And just like any given Sunday, the conclusion will mimic a postgame report as to what this decision means, and where do the contestants go from here.

I.  Antitrust Law — The Basics

Antitrust law did not evolve in a vacuum. Quite to the contrary, it is deeply entwined with American history, its roots going back to the progressive President Theodore Roosevelt, and his goal of stamping out or at least curtailing the monopolistic business practices that so dominated

late-Nineteenth Century America.[3]

Antitrust law in the United States essentially begins with the Sherman Act, promulgated in 1890.[4] The Sherman Act was intended to be a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition” by assuring that natural competitive forces interact freely, without manipulation or restraint.[5]

The Supreme Court has been steadfast in regarding the Sherman Act as akin to a common law statute, and, in interpreting that body of law, the federal courts act more as common law courts than in other areas governed by federal statute. This is so the antitrust law “adapts to modern understanding and greater experience… to meet the dynamics of present economic conditions.”[6]

Its three foremost weapons against restraint of trade are Sections 1 and 2 thereof. Section 1 explicitly prohibits “[e]very contract, combination in the form of trust or otherwise, or, conspiracy, in restraint of trade.”[7] Section 2, in turn, makes illegal any monopoly or attempt to monopolize.[8] But the true weapon of mass destruction found in the antitrust arsenal is the provision for an award of treble damages to prevailing private plaintiffs.[9]

It is essential to remember that the Sherman Act “prohibit[s] only unreasonable restraints of trade.”[10] It is axiomatic that Section 1 outlaws “only restraints affected by a contract, combination, or conspiracy.”[11] Section 1 liability has been limited to concerted conduct for nearly a century.[12] Therefore, it maintains a fundamental distinction between concerted and independent action.[13]

For these reasons, combinations such as joint ventures have always been adjudged under the Rule of Reason.[17] As we shall see below, the Rule of Reason has assured the sensible enforcement and adjudication of the antitrust laws for over a century now.

An icon of antitrust law is of course Standard Oil Co. of New Jersey v. United States.[18] The Justices of that era declared that the statute “should be construed in the light of reason,”[20] and that Section 1 is not aimed to interrupt all collaboration in business; rather, its explicit and rightful goal is to protect the free flow of commerce “from contracts or combinations… which would constitute an interference with, or an undue restraint upon [commerce].”[21]

Standard Oil confirms that the objective of American antitrust law is never to deprive business of the power and the right to make “normal and lawful contracts,” but instead solely to restrain malefactors from engaging in illegal combination or conspiracies aimed at the unlawful restraint of trade.[25]

In closing, it is appropriate to end with a final word on the Rule of Reason from the legendary Justice Brandeis, who provided the classic formulation in Chicago Board of Trade:[26]

“The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint is imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.”[27]

II.  Game Time: American Needle vs. the NFL

The National Football League (“NFL”) includes 32 separately owned professional football teams, each with its own distinctive names, colors and logos.[28] In 1963, the constituent clubs organized National Football League Properties (“NFLP”), an unincorporated entity, to develop, license, and market their intellectual property. From its inception until 2000, NFLP granted nonexclusive licenses to a number of vendors, permitting them to manufacture and sell apparel adorned with team logos.[29] American Needle was one of those licensees.[30]

All this changed at the end of 2000, when the teams voted to authorize NFLP to enter into exclusive licenses, and NFLP then granted such an exclusive deal for 10 years to Reebok International Ltd. Reebok now had the sole right to manufacture and sell trademarked headwear for all 32 NFL teams. As a direct consequence, NFLP did not renew American Needle’s nonexclusive license.[31]

Understandably chagrined, American Needle filed an antitrust action against the NFL and others, alleging that the exclusive contracts violated Sections 1 and 2 of the Sherman Act.[32] As their key defense, the NFL, the teams, and NFLP replied that they constituted a single economic enterprise, and therefore were incapable of conspiring to restrain trade within the meaning of Section 1.[33]

On this singular question, the district court sided with the league, concluding that the NFL and its constituent members comprised a single entity.[34] The Seventh Circuit affirmed, finding, inter alia, that football can only be carried out jointly, and the league can function only as one source of economic power when presenting NFL football.[35] Certiorari was granted,[36] and the matter came before the high Court.

Delivering the final opinion of his storied career, Justice John Paul Stevens[37] began by reciting the language of Section 1 of the Sherman Act.[38] Writing for a unanimous Court, Justice Stevens framed the precise issue as that “antecedent question” in relation to the NFL and its formation of NFLP to manage its intellectual property.[40] The Supreme Court declared that the league’s action

“is not categorically beyond the coverage of [Section] 1,” and the legality — or lack thereof — “must be judged under the Rule of Reason.”[41]

In the high Court’s view, the stricter oversight for concerted behavior is rooted in Congress’ recognition that joint action is inherently fraught with anticompetitive risk.[44] “The key,” according to Justice Stevens, is whether the concerted action “joins together separate decision makers.”[56]

If the accord between these entities deprives the marketplace of independent decisionmaking and chills the diversity of separate entrepreneurial interests, then it is violative of the antitrust law.[58] The high Court emphasized that “the inquiry is one of competitive reality,” and not artificial formalisms.[59]

Without equivocation or apology, the unanimous Court found that “[d]irectly relevant to the case, the [NFL] teams compete in the market for intellectual property.”[63] Each franchise is motivated solely by its own corporate aims to enhance individual wealth.[64]

Justice Stevens invoked the imagery of the then-reigning Super Bowl contestants: “[T]he [New Orleans] Saints and the [Indianapolis] Colts are two potentially competing suppliers of valuable trademark…. [t]o a firm making hats.”[65] Therefore, the Court reached the inescapable conclusion that “[d]ecisions by NFL teams to license their separately owned trademarks collectively and to only one vendor … depriv[e] the marketplace of independent centers of decisionmaking.”[67]

“An ongoing [Section] 1 violation cannot evade [Section] 1 scrutiny simply by giving the ongoing violation a name and label,” said the Court.[69] The high Court acknowledged that “NFL teams have common interests” in promoting the league as a unified brand, but the clubs “are still separate, profit-maximizing entities, and their interests in licensing team trademarks are not necessarily aligned.”[71]

Here Justice Stevens coined an analogy sure to be enshrined in the pantheon of antitrust jurisprudence: “a nut and bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to [Section] 1 analysis.”[77] Thus, American Needle declared unequivocally that while the teams may work in unison in some sense, they are surely not immune from antitrust scrutiny when they collaborate economically.[78]

The Supreme Court ruled that “decisions by the NFLP regarding the teams’ separately owned intellectual property constitute concerted action.”[81] The 32 football teams retain independence, operate as individual profit centers, distinct from each other and NFLP, and are at least potential (if not actual) competitors.[82]

The Justices hypothesized that if potential competitors could share profits or losses in a joint venture without worry of Section 1 inquiry, “then any cartel could evade the antitrust law simply by creating a joint venture to serve as the exclusive seller of their competing products.”[83]

Justice Stevens offered some words of comfort to the NFL: “[f]ootball teams that need to cooperate are not trapped by antitrust law.”[85] A “host of collective decisions,” such as scheduling and then producing games, “provides a perfectly sensible justification” for concerted action.[86] The Supreme Court pledged that the axiomatic and flexible Rule of Reason would be applied.[87]

Finally, the Supreme Court reversed the holding below, and cleared the path for the case to continue on remand.[88] And so ended the Supreme Court’s newest landmark of antitrust law.

III.  Analysis & Commentary

American Needle is, technically speaking, an interlocutory decision. It lacks finality, as it makes no decision as to the ultimate winners and losers in the subject litigation. It is a preliminary decision, one that sets the rules, and remands to the lower courts for further determinations consistent with its holdings.

American Needle has been, in most likelihood, the most quoted and publicly visible antitrust ruling of the Supreme Court since the turn of the last century. At the time of this writing, the NFL owners and the NFL Players’ Association (the “NFLPA”) have been embroiled in an epic labor dispute.

American Needle is mentioned in nearly every news article on football’s labor strife.

The undeniable point remains that the NFL shall henceforth be deemed to be a collection of independent economic forces that, from time to time, band together and act in economic concert in order to enhance their corporate profits.

Nonetheless, all professional sports leagues must proceed mindful that American Needle is as applicable to badminton as it is to NFL football. Each and every professional league must take due note that when collaboration exceeds the boundaries of what is essential and appropriate to put on an exhibition of their sport, and crosses the line into a stifling of competition, to the injury of others, then antitrust scrutiny shall be next week’s opponent.

The Supreme Court has long acknowledged that league sports intrinsically need to cooperate and take concerted action in order to function.[89] American Needle does nothing to upset the truism that a team cannot play itself.

For American business generally: just as in professional football, combinations that rob the free market of independent centers of competing economic interests are illegal. Businesses, regardless of what their precise occupations are, must hereafter be mindful that joint ventures, combinations and other forms of concerted action can expose them to antitrust liability.

American Needle maintains the same consistency within antitrust jurisprudence that has abounded for over a century. By reaffirming tried and true maxims, this latest Supreme Court landmark maintains that much valued consistency.

American Needle furthermore reaffirms the notion that not every combination is bad. Justice Stevens makes clear that the law has always reserved its scrutiny for joint ventures that truly act to restrain competition.

In this and all other respects, American Needle confirms the long held and undeniably just maxim that substance rules over form. Mere labels have no sway in antitrust cases, nor should they, says the high Court.

In its own way, American Needle is the modern implementation of Chief Justice Hughes’ maxim that “[realities] must dominate the judgment in antitrust cases.”[90]

In sum, American Needle does more than just declare the Rule of Reason is applicable to the case at bar; its fundamental adjudication confirms the ongoing and essential role of such a mode of analysis in all such cases to come.

Conclusion

In conclusion, American Needle has gone from making headlines in the field of law to now the field of professional football. It affirms that even the obvious need for collaboration in the business of the NFL has its just limits, those boundaries to be measured by the nation’s longstanding antitrust laws. So too for other professional sports, and so too for the rest of American business. But in doing so, we find the Supreme Court affirming basic notions that not all collaboration is illegal — rather only concerted action that unlawfully drives out competition. Tried and true rules, above all the proven and just Rule of Reason, will dominate the field when measuring such actions for their propriety. It is still early in the game, but American Needle makes certain that, in the end, the real winner will be justice.[91]

Footnotes & References

  • Over a half-century ago, the Supreme Court declared that the NFL falls within the coverage of the antitrust laws. Radovich National Football League, 352 U.S. 445, 448 (1957). Of all the major American sports leagues, only Major League Baseball enjoys an exemption from the antitrust laws. See Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200, 209 (1922); Flood v. Kuhn, 407 U.S. 258, 282–84 (1972).
  • American Needle, v. National Football League, et al., U.S. , 130 S.Ct. 2201 (May 24, 2010). Full text available via Justia Supreme Court.
  • See Edmund Morris, Theodore Rex (Random House 2001). See also Northern Securities v. U.S., 193 U.S. 197 (1904). Available via Justia.
  • Anti-Trust Act of July 2, 1890, ch. 647, 26 Stat. 209. Full text of the Sherman Act: 15 U.S.C. § 1 (Cornell LII).
  • Northern Pacific Co. v. U.S., 356 U.S. 1, 4–5 (1958), quoted by N.C.A.A. v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104 n.27. Available via Justia.
  • Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 885–87 (2007). Available via Justia.
  • 15 U.S.C. § 1 — Full text at Cornell LII.
  • 15 U.S.C. § 2 — Full text at Cornell LII.
  • 15 U.S.C. § 15(a) — Full text at Cornell LII.
  • C.A.A. v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 98 (1984). Available via Justia.
  • Copperweld v. Independence Tube Corp., 467 U.S. 752, 775 (1984). Available via Justia.
  • S. v. Colgate & Co., 250 U.S. 300 (1919). Available via Justia.
  • Monsanto v. Spray-Rite Service Corp., 465 U.S. 752, 761 (1984). Available via Justia.

[17] See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977); Chicago Board of Trade v. United States, 246

U.S. 231 (1918). Available via Justia (Continental T.V.).

[18] Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911). Available via Justia.

[26] Chicago Board of Trade v. United States, 246 U.S. 231 (1918). Available via Justia.

[27] Id. at 238, cited by American Needle, 130 S.Ct. at 2217 n.10. See also Leegin Creative Leather Products, 551 U.S. 877, 885–87 (2007) — Justia.

[83] Quoting Major League Baseball Properties, Inc. v. Salvino Inc., 542 F.3d 290, 335 (2d Cir. 2008) (Sotomayor, J., concurring). Available via Justia.

  • See C.A.A. v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 101–02 (1984), quoting R. Bork, The Antitrust Paradox 278 (1978). Available via Justia.
  • Appalachian Coals, Inc. v. United States, 288 U.S. 344, 360 (1933). Available via Justia.
  • See Brady, et v. National Football League, et al., 11 CV 00639 (SRN) (D. Minn.). For background on the NFL labor dispute, see NFLPA official website.

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About the Author

Michael Sabino — Third year student, Brooklyn Law School (J.D. anticipated 2012); currently interning for Hon. Leonard Wexler, U.S. District Court, Eastern District of New York. Published author of the Fordham Journal of Corporate and Financial Law, as well as The Natural Gas and Electricity Journal. Website: https://www.brooklaw.edu