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Tuesday, August 19, 2008
 
The Return of The Single Entity Defense for Sports Leagues

The Seventh Circuit ruled yesterday in American Needle v. NFL (No. 07-4006) that NFL teams act as a single entity “when promoting NFL football through licensing teams’ intellectual property“ and are therefore not subject to scrutiny under Section 1 of the Sherman Act.

To give some brief background on this case, the plaintiff (American Needle) designs, manufactures, and sells apparel bearing the names and marks of pro sports teams. For more than 20 years, American Needle held a non-exclusive license from the NFL to manufacture and sell headwear with each of the NFL’s team logos. In 2000, the NFL teams authorized NFL Properties to solicit bids from vendors for an exclusive headwear license. Reebok won the bidding war and received a 10-year exclusive license. At that point, American Needle’s non-exclusive license was terminated and it responded by filing an antitrust claim against the NFL, NFL Properties, each of the NFL teams, and Reebok. The district court granted summary judgment for the NFL defendants, ruling that the NFL and the NFL teams “act as a single entity in licensing their intellectual property.” The district court opinion was discussed here.

The single entity issue is obviously very important and has been the subject of much debate over the years, and I plan to discuss that issue and this case in more detail later on, but I just wanted to give my quick reaction after reading the Seventh Circuit opinion.

The court starts from the premise that, under Copperweld (467 U.S. 752 (1984)), “when making a single entity determination, courts must examine whether the conduct in question deprives the marketplace of the independent sources of economic control that competition assumes.” The court then jumps to the conclusion that:

NFL teams can function only as one source of economic power when collectively producing NFL football. Asserting that a single football team could produce a football game is less of a legal argument then [sic] it is a Zen riddle: Who wins when a football team plays itself? It thus follows that only one source of economic power controls the promotion of NFL football; it makes little sense to assert that each individual team has the authority, if not the responsibility, to promote the jointly produced NFL football. Indeed, the NFL defendants introduced uncontradicted evidence that the NFL teams share a vital economic interest in collectively promoting NFL football.
Putting aside the need for some new Zen riddles, I’m not sure I follow the court’s reasoning, and the opinion seems to conflate the single entity analysis with the ancillary restraints doctrine (discussed in the comments to Rick’s post). Nearly every judge and commentator has concluded (sometimes even without a Zen reference) that some degree of cooperation among individual sports teams is necessary for a sports league to exist. To use a simple example, the Jets can’t play the Patriots unless both teams agree to play a game on a certain date, with certain rules of the game, etc. Courts have relied on the necessity of this cooperation to permit sports leagues to avoid per se illegality in Section 1 cases, but the Seventh Circuit seems to be taking the argument to the other extreme and arguing that NFL teams should be considered a single entity whenever they agree on rules that allow them to play the game (ie, that are necessary for the product to exist).

Assuming, for the sake of argument, the court’s analysis is correct for the single entity issue in those limited circumstances, I don’t see how that answers the single entity question when the activity in question is the sale of NFL-logoed headwear. Yes, the NFL teams have a shared interest in the survival of the NFL (because, under the court’s argument, they don’t exist unless the NFL exists), but does that also mean that the NFL teams have a shared interest (or an independent source of economic control) when selling hats with their team logos on it? It seems to me that the correct answer to that question has more to do with the fact that NFL teams share merchandising revenue equally than Zen riddles. Yet, the Seventh Circuit does not even specifically mention this fact in its opinion, instead choosing to rely on the generic notion of a shared interested in “promoting the NFL” through the sale of logoed wool hats.

There is at least one other troubling aspect of the opinion. The court asserts that: “Simply put, nothing in Section 1 prohibits the NFL teams from cooperating so the league can compete against other entertainment providers. Indeed, antitrust law encourages cooperation inside a business organization—such as, in this case, a professional sports league—to foster competition between that organization and its competitors.” Is the court concluding that the NFL is in the same relevant market as all other entertainment providers (and what is an “entertainment provider”?)? Based on what? And is the Seventh Circuit referring to the market for games (live or televised?) or the market for logoed apparel? I am all for streamlining the determination of the relevant market, but this seems a bit extreme.

I’m not surprised that American Needle lost the case—I thought this would have been a relatively easy rule of reason win for the NFL. I am surprised, though, that this case was disposed of based on the single entity issue. The holding in this case is fairly narrow, but the single entity argument for sports leagues is officially alive (at least in the Seventh Circuit), and I suspect the leagues will do their best to expand its use in future cases.





16 Comments:

This other sports law your best very nice

regards
Hrithik Roshan

Blogger kutty -- 8/20/2008 3:06 AM  


Even if this is the right outcome, I agree that the logic is flawed. Sure, with some things the NFL must act together - broadcasting rights (but not preseason, as local networks do that), games, etc.

But to say that it can ONLY act that way is illogical. Why can't each team control marketing its own trademarks? It's own website? (until recently the NHL did) It's own cap licensees? This might not be the BEST way to do it (hence your rule of reason comment), but the ONLY way? I doubt it. The NCAA doesn't seem to have that problem - conferences act together to schedule games but schools manage their own marks.

Anonymous Michael Risch -- 8/20/2008 7:49 AM  


Gabe,

Very interesting post. I think it's the wrong decision for two reasons: (1) The single entity defense has been widely-rejected by numerous courts, and I think for very good reasons, and (2) this case involves entirely an economic/commercial issue on its face as opposed to an issue regarding sport governance (similar to the ancillary restraints doctrine, although I am willing to go a little further than merely rules of the game). In my opinion, this case should go to a jury and I can't even begin to speculate what result.

So I agree with you that this decision is wrong on the single entity issue, but I don't understand your further position that the NFL should probably win anyways because "this would have been a relatively easy rule of reason win for the NFL". In the end, if that's your position, is it really significant how it gets dismissed? I seem to recall your position on the ATP case as somewhat similar -- i.e. that the ATP should have won the case under a rule of reason. I guess I don't understand how you can possibly conclude as a matter of law that any party should prevail under a rule of reason analysis, because it becomes a fact intensive inquiry involving very complex questions of product and geographic markets and economics (including its extremely confusing application to sports).

So to put it a different way, maybe I'm wrong but it just seems to me that you believe that the NFL and ATP should prevail for some reason other than a weighing of the procompetitive and anticompetitive affects on the market (because I don't know how one could possibly make a rule of reason determination without hearing all of the evidence and expert witness testimony). If I'm right, then what's the reason? If I'm wrong, then I look forward to discussing it with you more at the next sports law conference....

Blogger Rick Karcher -- 8/20/2008 9:53 AM  


Rick--

There’s no question that this decision goes against the grain. The Seventh Circuit did foreshadow the rebirth of the single entity doctrine in the WGN cases, but I’m not sure this even fits into the hybrid structure suggested in those cases.

As for your question, I think it’s tremendously significant how the case gets dismissed, even if the result is the same. My argument is just the opposite of what you suggest. I think these cases should all be determined by the net competitive effect of the agreement. I just think there are certain types of agreements where it seems relatively clear that the procompetitive benefits outweigh the anticompetitive effects. To me, this seems like one of those cases (particularly if the relevant market really is all forms of entertainment). Of course, a judge or jury could very well disagree with me (which is why I prefaced my answer with “probably” and “relatively”).

I am all for creating shortcuts to more easily determine net competitive effects or create rebuttable presumptions of net competitive effects (which is why I am intrigued by your ATP proposal), but I don’t think sports leagues should be given blanket immunity from antitrust scrutiny. At the end of the day, their agreements may very well prove to be legal, but I’d like to see that determination tied to competitive effects.

Blogger Gabe Feldman -- 8/20/2008 11:48 AM  


Just to clarify a statement from Professor Feldman's last comment, even if a sports league is granted single entity status, that does not equate with a blanket grant of immunity from antitrust law. The single entity status only shields the league from Sherman Act section one. Other antitrust provisions would still apply, most notably Sherman Act section two.

Anonymous Anonymous -- 8/20/2008 12:01 PM  


o.k., then why is it "relatively" or "probably" clear?

Blogger Rick Karcher -- 8/20/2008 12:12 PM  


Unfortunately, that's quite a disingenuous "clarification" from Anonymous at 12:01 p.m. Although single entity treatment is not "a blanket grant of immunity from antitrust law," it's pretty darn close. Section 2 only deals with monopolies. Immunity from Section 1 would mean they could take any anticompetitive steps they want short of monopolization -- up to and including price fixing. Saying they're still subject to Section 2 means next to nothing in the real world.

Anonymous Anonymous -- 8/20/2008 12:16 PM  


Anon-- Thanks. Excellent clarification. I should have written: "but I don’t think sports leagues should be given blanket immunity from Section 1 antitrust scrutiny."

Blogger Gabe Feldman -- 8/20/2008 12:18 PM  


Anon 12:16:

To be accurate, Sherman section two deals with more than just monopolies, and specifically addresses attempted monopolization.

As for the price-fixing concern, that really is only an issue in the media markets housing multiple NFL franchises (i.e., NYC and SF/Oak). Otherwise, it's hard to discern what Green Bay and New England would have to gain by agreeing to set ticket prices at a certain level, considering the two teams don't realistically compete for ticket sales.

- 12:01

Anonymous Anonymous -- 8/20/2008 12:49 PM  


Rick:

I am in agreement with Gabe on this one. The reason it is significant how the case ultimately gets dismissed (single entity defense versus Rule of Reason), is because if this 7th Cir. version of the single-entity defense holds up, it creates case law that in future matters might allow a court to determine behavior is per se legal, even if the net effects would be found anticompetitive upon full analysis.

My fear is that this decision opens the door for courts to allow certain concerted behavior in sports based on public policy, rather than based on competitive effects. This outcome runs against the Supreme Court's clear intent in both Radovich (NFL subject to antitrust laws) and Professional Engineers (antitrust is not about public policy).

I understand that we will be on the same panel at Seton Hall, discussing NFL commissioner suspensions for off-the-field misconduct. This is one of the areas where I am concerned the NFL will next try to apply American Needle (presuming the non-statutory labor exemption does not apply), even though there are more obvious net anticompetitive effects in that setting.

Anonymous Marc Edelman -- 8/20/2008 6:03 PM  


Guys, you're missing my point. I'm just simply questioning Gabe's assertion that "this would have been a relatively easy rule of reason win for the NFL." He made the same remark in regards to the ATP case. I'm also questioning Gabe's position, which he has stated more than once, that "there are certain types of agreements where it seems relatively clear that the procompetitive benefits outweigh the anticompetitive effects." Sorry, but I just don't understand how the answer to a full rule of reason analysis, which is extremely complex and fact intensive, can be "relatively clear" without hearing any of the evidence and expert witness testimony concerning markets and economics.

Blogger Rick Karcher -- 8/21/2008 7:25 AM  


Rick:

Thanks for the clarification. As I re-read your 9:53 A.M. post, I see where you are coming from.

Anyway, glad to see double digit comments (and interesting discussion) on the blog.

Best,
Marc

Anonymous Marc Edelman -- 8/21/2008 8:24 AM  


Rick,

Not to speak for Professor Feldman, but I'm assuming his analysis is based on more of a truncated rule of reason analysis, ala NCAA. Are you arguing that any case involving professional sports leagues inherently requires a full-blown rule of reason analysis? If so, I'd have to disagree.

Anonymous Anonymous -- 8/21/2008 8:44 AM  


Rick—
To address your second point first, I’m merely making the argument that some agreements—on their face—appear to have insignificant anticompetitive effects and significant procompetitive benefits. I think easy examples of those types of agreements include schedules for leagues, rules of the game, etc. I don’t think a complicated analysis is necessary to figure out that there are no real anticompetitive effects of agreeing on the number of timeouts per game. The further away we get from rules of the game to more economic/off-the-field agreements, the more difficult the analysis likely becomes, but, from that point, it is just a matter of degree. That was the point I was making in the comments to your ATP post (not that the ATP should have won that case easily). In other words, just as some agreements appear to be inherently net anticompetitive (horizontal price fixing, and other per se violations), other agreements appear to be inherently net procompetitive.

For this case, I think that’s exactly what both the district court and Seventh Circuit were really saying in their opinions. Although they (in my mind) incorrectly couched it in terms of the single entity defense, the courts were really holding that the NFL’s exclusive licensing agreement does not violate the laws because it had obvious procompetitive benefits and minimal anticompetitive effects. As the district court explained:

Why the NFL should opt for that structure is obvious. To require that 32 teams each take total responsibility for the protection and marketing of its own logos and trademarks in a nationwide market would cause each to be at a competitive disadvantage with other leagues with integrated marketing. Sharing the revenues (or tax deductions), despite some teams being in much larger markets, serves the interest in having the teams relatively competitive.

Coupled with the Seventh Circuit’s incredibly broad quasi-definition of the relevant market (which is consistent with the district court’s conclusion), I think it would be very difficult for American Needle to allege any real anticompetitive effects. That’s why I think this would have been a relatively easy win for the NFL. Could I have been proved wrong by a full blown rule of reason? Of course, just as facially inherently anticompetitive agreements can turn out to have procompetitive benefits.

Anonymous Gabe Feldman -- 8/21/2008 11:07 AM  


Sorry to wake a sleeping giant, but there is something I just don't understand about the 7th circuit's opinion. Even if the NFL can be considered a single entity for the purposes of licensing intelectual property, why is the contract/combination/conspiracy between the NFL and Reebok not subject to section 1 review? The court seems to easily dismiss the combination under the analysis of the section 2 claim. However, aren't section 2 claims only for unilateral/single entites? Isn't the exclusive contract between Reebok and the NFL exactly the type of activity section 1 seeks to police? Although the exclusive license to Reebok may have withstood a rule of reason examination, Shouldn't the court have applied this analysis because clearly the NFL and Reebok are separate entities? Any thoughts for a confused law student?

Anonymous John O. -- 10/13/2008 12:51 PM  


Did you see or Know about any Sports Leagues?
Reebok is supporting many sports league in the manner of Reebok Codes in which they offer promotional support to their leagues.

Anonymous Anonymous -- 10/05/2009 6:27 AM  


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