Sports Law Blog
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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.